Should You Invest in a Rental Home? Here’s Clark’s 1% Rule

Are you thinking about making some money moves with your home? The current housing market presents some opportunities you may want to take advantage of.

Money expert Clark Howard recently heard from a retired listener who wanted to know whether he should go in 50% with his daughter to buy her current home for $300,000. She would turn the house into a rental unit and buy a new place for herself.

Ask Clark: Is It Wise To Invest in a Residential Rental Property?

Clark says such a question comes with a lot of variables, including the big one: “What kind of rent can you generate per month?”

“In order to make it into something that is considered to be a solid investment, the rent you can get out of it needs to equal 1% or more of the value of the property currently at the time you would buy in the half interest, he says.”

Here’s How Renting Out Your Home Would Make Sense

“If the property’s worth $300,000, that means you’d have to be able to get effective rent of $3,000 or more a month to get what would be a reasonable return on your investment,” Clark says.

He advised the listener that, if he could get $3,000 or more per month with a traditional long-term lease, then the purchase would be a good deal for him and his daughter.

On the Other Hand …

Clark says if the only way to get to that $3,000 a month threshold is by listing the home on a short-term rental service such as Airbnb, then renting it out may not work out financially.

“Airbnb is not equal to doing a long-term lease because you have a lot more expenses involved with constant turnover of tenants,” he says. “There tends to be more maintenance that’s going to be required and potential repairs when you have a property as an Airbnb.”

Also, your potential for steady income is less certain if you rent the home short-term.

“With an Airbnb, your business model has to work at 50% occupancy, which means that you are occupied 50% of the nights or more,” Clark says. “If it’s a property that maybe has certain peak weeks but you’d have much lower occupancy than that, it makes it hard for an Airbnb to really work for a reliable income.”

The Deciding Factor: Your Motivation

In the end, Clark says whether you decide to rent out your home or not has a lot to do with your expectations and motives.

In the case of the listener, Clark asked, “Are you doing this to help your daughter, or are you doing this as strictly an investment?”

If your answer to that question is just to help out another person, Clark says the income you generate is not as important.

On the other hand, “If generating adequate income from it is very important for you to live a secure life going forward, then the numbers have to work,” he says.

ExploreThis article was originally published on Clark.com

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