You may already know how much money you'd like to get for renting the apartment. But is it realistic? You need to find out because if you ask too much, people looking for an apartment will pass you by and go to landlords with more competitively priced units. If you don't charge enough, people may flock to your door in a rush to become your tenant — but you won't make enough money to pay expenses, let alone make a small monthly profit.

Instead of arbitrarily picking a number and calling it “rent,” plan on doing your homework, including market research. Find out what competitors in your area are charging for comparable duplexes or owner-occupied buildings. Find out if there's a glut of empty units on the market and whether rents are stable or showing signs of going up.

Consider Your Situation

One expert estimates that 20 percent of each month's rent goes toward paying taxes, 65 percent toward the mortgage and other monthly bills, and 12 percent toward repairs and maintenance. What's left — 3 percent — is the monthly “profit” on a unit. Others put the return a little higher — at about 6 percent. And yet another group will say they don't expect to realize a profit until they sell their rental property. That may be especially true if your tenants are renting a single-family home.

If you are a retiree, chances are you've already paid off your mortgage. So as long as you didn't go overboard by taking out a huge home-improvement loan to convert your home into a two-unit, you should get enough rent each month to help you stretch your retirement income. That means your pension and savings will go further. (See Chapter 4 for more information about loans.)

If you're just buying a new home and got a good deal on an inexpensive fixer-upper in a neighborhood that's being revitalized or a foreclosed home, the rent you collect undoubtedly will help you pay the mortgage. Your profit will be mostly on paper as you build equity and the dwelling appreciates.

Landlords in both of these situations will be able to deduct the cost of repairs and maintenance — which, of course, will be higher for a fixer-upper than those on a single-family residence owned by a retiree — on their tax returns. You'll be able to depreciate your building and the cost of capital improvements and you'll benefit from tax benefits and credits, especially if your building is in a Renaissance zone or historical district, or qualifies for a lead-free program. For information check with local authorities.

Analyze the Market

So how do you figure out how much to charge for rent? First you have to find out what other landlords in your area are asking for rent. Start out by looking at “For Rent” ads in the newspaper or on the Internet. Find listings for units that sound similar to yours and make note of the rent. If prices aren't included, call, pretending you're looking for an apartment. You don't have to actually see it, just ask a few questions on the phone.

Next, talk to someone with a professional interest in property. Make a call to the owner or employees at a local property management company, a real estate office that advertises apartment listings, an apartment-finding service, or a professional association for landlords. They'll have sound information about what rental rates are for properties similar to yours.

Talk to landlords, too. You might not want to ask a neighbor with an owner-occupied home just like yours — after all, you're competitors. But landlords with fourplexes or six-unit buildings will have a good handle on the entire market. They'll know what sort of rent owner-occupied dwellings can support and whether property values are stable or increasing. Ask them where they think the rates will level off. They might not be exactly right, but they'll be close enough to give you an idea of what you're working with.

Find a mentor, someone who's been in the business a long time and is willing to help you learn the ropes. Get together periodically for a working lunch. You can probably list it as a deductible business expense on your income tax return, along with seminars and workshops you attend. Check with your tax preparer.

Forecast Market Trends

To have a viable business, keep current on market prices. Look at the ads at least once a week. Watch what's happening at the apartment complexes. If they are offering a month's free rent, you can be certain there are too many vacancies and the competition for renters is hot. If the complexes are raising rent, then the market has swung in favor of landlords. You can probably ask a little more.

Keep in mind, however, that you have a totally different product than an apartment in a large multifamily community. Your duplex or house may have a nice backyard, which is a lot more attractive to some renters than a third-floor unit in a big building.

You especially want to track comparables on a regular basis. Those are the owner-occupied dwellings in your area. Look for vacancy signs and watch the newspaper ads. Are the owners still asking the same amount of rent that you are? If so, you should be fine for a couple of months. Don't slack off, however. Check out prices at least once a month.

What's the Cost of Living?

Another gauge of what's happening is the cost of living. Has the Consumer Price Index (CPI) gone up? If so, how much? Does it indicate runaway inflation? Or is the country in a recession? Generally when you see prices rise on goods and services, it can indicate that rental rates will soon follow. But that also depends on the overall economic outlook in your area. If people are losing jobs and homes, and families are hurting because of escalating costs for food and fuel, they won't have money for costly apartments. And if you have a tenant on a year's lease, you can't collect more, even though you might need it to meet expenses, until the lease expires. (See Chapter 15 for information on renewing leases.)