One of the main benefits of home ownership is that you can often rent the property and make enough money to cover your mortgage and make additional income for yourself. If you have an additional home or someplace else to stay, this is a great way to make money. Many small and medium sized businesses have been started when home owners rent out their homes to generate additional income. Eventually, they can purchase more properties and continue to grow income. However, many people wonder when is the best time to put a home on the market.
Income to Price Ratio
One of the most important indicators used to determine the rental market is the income to price ratio of homes in the area. This is a little complicated but gives a good sense of whether buying a home is affordable to most people in the area. The ratio is determined by dividing the median home price by the median salary in an area. For example, if the median home price is $100,000 and the median salary is $50,000, the ratio 2x. Generally a healthy ratio is between 3x to 4x. At the peak of the housing boom in 2007, the ratio reached 7x. This was obviously way to high.
During these periods, people should not be buying new homes because they are unreasonably expensive. Instead it is better to rent for most people and wait until home prices become more affordable.
Home owners should examine the trends in their community. If the ratio is above 4x and has been rising steadily over time, it is a good time to rent out your property. More and more people will need to find an place to stay as they cannot afford to buy themselves. That means rents will rise, you will have greater profits and more demand.
Seasonality actually also makes an important impact on the price of rents. Certain times of the year have much higher demand for new housing than other times of the year depending on the area. However, a general rule is that rents begin rising in May and June, stay high in July and August and slowly begin going down after September. This occurs primarily based on the school schedule but also because people generally prefer to move during warm weather rather than in the cold.
Personal Profit Using Comps and Costs
Another way to decide to rent your home is by calculating your personal profit. The first thing to calculate this is to look at the rents for similar properties in your community. Make sure to find places that have a similar quality, number of bedrooms, number of bathrooms and access to schools, parks or retail locations. Once you have found several comparable properties (comps), average these rental prices together to get the expected amount that you can rent out the home for one month. For example, you may be able to get $1,000 per month in rent for your home.
Next, calculate the total amount that you pay in terms of mortgage and maintenance. For example, you may have mortgage payments of $600 per month. Additionally, you have to pay for landscaping, plumbing, any emergency fixes, insurance and professional property management. Those could total an average of $200 per month. You may leave the heating, cooling and electricity costs to the tenant.
Taking everything into consideration, you will profit $200 per month or $2,400 per year. These funds could be plowed back into the mortgage to pay off the home faster, into other investments or into improving your lifestyle.
On the other hand, you must consider the costs associated with your new living situation and whether it is worth the trade-off when taking into account the extra $2,400 in profit.
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