Use The One Per Cent Rule To Determine How Much To Charge When Renting Your Property

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]

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Comments

    Yes because basing rent on your repayments and not what current market rental prices are is sure to land you a Tennant.

      Don't be so sure, i have seen an absolute turd of a house go for over $400 a week, it's only redeeming feature was it was on an esplanade. It was an old holiday shack where all the fixtures were rusty, room sizes wouldn't even fit a single bed, the backyard was a sand dune and the front retaining wall had collapsed. It was also a 12 month lease.

    Based on that the house I live in should rent out for around $872 a week ($375,000 * 0.01 / 4.33). Yeah, that doesn't work. That is a lot more than I pay on my mortgage!

    The going rate for my property would be around $350 a week, $1500 a month. That is 0.4% of value going by their formula. Don't think this is really applicable to Australia.

      my thoughts also, I pay 530 pw/ 2300pcm in a unit and the unit is worth about 550k so by the way they have presented the formula i should be paying 5500 per month which frankly would be insane.

      Maybe another copy paste US article?

    "Rent for $2000" per what? Week? Month? Fortnight? Year? Forever?

    You also need to consider what "paying for itself" actually means. If you rent out a property for 10 years, you still own the property. It may have depreciated a little in terms of the house value, but you still have it available to sell. These measures shouldn't be done as absolutes, but as a return on invested capital.

    This is a US article and doesn't correlate.

    The rule of thumb in Australia has long been property price/1,000 = weekly rental, with pluses or minuses being given for things like property condition or proximity to universities, etc. that mightn't factor much into the sale price.

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