Owning rental property is a great way to generate passive income. If you're not sure how to pick a property or determine what rent should be, use the one per cent rule as a guide. Photo by David Amsler.
As personal finance site Afford Anything points out, if the rent you charge is less than per cent of the overall cost of the rental property, it's going to take too long for the property to pay for itself. Additional costs accumulate over the years, and you still need to pay back the initial cost as well. If you're charging anything less than per cent of the home's worth, it could take decades to be worth it:
If a property costs $205,000 and rents for $2000, it's a rounding error away. That's fine, as rental pricing itself is an approximation. A property that "rents" for $2000 could be priced between $1900 — $2100 depending on the season, lease term, and other variables.
Rent is a range. There's no such thing as a property that only rents for $2,000.00, with no variation. Even at that price, a GRM of 102.5 instead of 100 won't murder your returns. But if a property costs $205,000 and rents for $1400, skip it. You deserve better.
For renters, the flip side of this is also helpful information. If you're viewing a rental property, you can also check out how much the property costs on the market. If the price-to-rent ratio is unfavourable to a landlord, it may be favourable to you, allowing you to get more home in a better neighbourhood than what you're paying for it.
Why the One Per cent Rule Matters (When Buying a Rental …) [Afford Anything]