Before You Buy a Rental

I

Rent

What will it actually rent for?

The rent in the listing is a guess. Asking rents, seller projections and "could rent for" notes are marketing. What matters is what similar homes nearby have actually rented for recently.

Start with three to five comparables. Same bedrooms and bathrooms, similar size and condition, within about a mile, rented in the last few months. Adjust for what is included: a rent that covers water and trash is not the same as one that does not.

Use public benchmarks as a sanity check, not an answer. HUD publishes Fair Market Rents by bedroom count for each metro area, measured as gross rent including basic utilities. They help you spot a rent that is far out of line, but they are not an estimate for a specific address.

Sources: U.S. Department of Housing and Urban Development, Fair Market Rents

II

Vacancy

How many months will it sit empty?

Every rental sits empty sometimes. Between tenants you clean, repair, list and screen. Budgeting zero vacancy means the first turnover comes straight out of your pocket.

Think in weeks, then convert to a percent. One empty month a year is about 8% of annual rent; two weeks is about 4%. Add collection loss too: rent that is owed but never paid.

Local data helps you choose the number. The Census Bureau publishes rental vacancy rates every quarter for the country, regions and large metro areas. Your own unit still depends on the tenant, the season and the condition you rent it in.

Sources: U.S. Census Bureau, Housing Vacancies and Homeownership (CPS/HVS)

III

Operating costs

What does the rent have to pay first?

Operating costs are everything except the mortgage. Property tax, insurance, repairs and maintenance, property management, HOA dues, any utilities you pay, lawn and snow care, accounting and advertising. IRS Publication 527 lists most of these as rental expenses.

Get real numbers for the big ones. Pull the actual tax bill from the county, and expect it can rise when a sale resets the assessed value. Get an insurance quote for a landlord policy, not a homeowner policy, and ask local managers for their fee.

Rules of thumb are a smoke test. You will hear that operating costs run near half the rent. For a given home that can be far off in either direction, so use it only to notice a budget that looks too thin.

Sources: Internal Revenue Service, Publication 527, Residential Rental Property

IV

Mortgage

What is the payment that never skips a month?

The payment does not care how the month went. On a fixed-rate loan, principal and interest stay the same whether the home is rented or empty.

Loans for a home you will not live in usually cost more. Lenders generally ask for a larger down payment and price investment-property loans higher than loans for a home you occupy. Get several quotes and compare the Loan Estimates line by line.

Early payments are mostly interest. In the first year of a 30-year loan most of each payment goes to interest. Paying down principal builds equity, but it is not cash you can spend this month.

Sources: Consumer Financial Protection Bureau, Loan Estimate explainer

V

Repair reserve

What wears out while you own it?

Some costs arrive as a surprise but should not be surprising. Roofs, water heaters, heating and cooling systems and appliances all wear out. The question is when, not whether.

Save a little every month instead of a lot at once. List the big components, estimate what each costs to replace and how many years it has left, and set aside the difference each month.

Your inspector is your best source. Ask the home inspector for the age and condition of each major system. Ages on a seller disclosure are a starting point, not a promise.

Sources: Consumer Financial Protection Bureau, Schedule a home inspection

VI

Cash to close

How much do you need on day one?

The down payment is only the biggest piece. Add closing costs such as the appraisal, title insurance, lender fees, government taxes and prepaid items like insurance and property tax, plus any repairs before the home can be rented.

Get the exact figure from the Loan Estimate. Page one shows the estimated cash to close, and the Closing Disclosure you receive before closing shows the final number.

Keep a reserve you do not touch. Months of expenses set aside mean one bad month cannot force a bad decision.

Sources: Consumer Financial Protection Bureau, What fees or charges are paid when closing on a mortgage and who pays them?, Consumer Financial Protection Bureau, Loan Estimate explainer

VII

Break-even rent

What rent does it need just to pay for itself?

This is the number to beat. Break-even rent is the monthly rent at which rent, after vacancy, covers operating costs, the mortgage and the repair reserve with nothing left over.

Compare it with number one. If the realistic rent from your comparables is below break-even, the property costs you money every month.

Leave a margin. A deal that only works at the top of the rent range, with no vacancy and no repairs, has no room for an ordinary bad year.