Mental Exercise for Rentals

Photo by Mika Baumeister on Unsplash

Part 1: No Where to Rent

Several different friends have been apartment hunting post-COVID, and the housing market (2022) is insane. My house is valued at triple what I paid for it eight years ago. The constant barrage of “sell you house for cash” may seem tempting with that sort of price jump, but everything has soared along side my home. I can’t afford to move, and the friends who are rental-hunting can’t afford anything on the market.

The price tag of housing in my brain is completely screwed up at this point. Should housing be what I paid for when I lived in New Jersey or in Texas? Before or after the housing crisis, or COVID, or the Great Recession. I remember when I was in college in Michigan in the eighties being shocked that the houses there cost as little as a car cost (having arrived from the metropolis of the East Coast where it was four or more times as much).

What SHOULD be the cost of housing, ignoring price gouging landlords and hyper-inflation pricing?

The rule of thumb is 30% of your gross income (before taxes), but the housing 30% should include rent/mortgage, interest, house or renter’s insurance, property taxes, appliances, and utilities (heat, water, sewer, trash collection, electricity, internet, phone). For a couple with two lower income jobs ($10 an hour each) – about $40,000 a year – that is $1,000 a month. Since most rentals do not include all the bills (such as renter’s insurance), a rental would need to be about $850 … and neither can get sick since low-income jobs rarely include sick leave or vacation time.

Housing in my area is running $1,000 to $2,000 for rentals.

When I think costs of something are too high, I run a mental calculation to see what needs to be charged for the person selling the product to make a living at it. I’m going to do that for apartment/house rentals.

Part 2: The Exercise – How Much a House Actually Costs to Own

I’m going to focus on a two-bedroom, one-bath, 1,000 square foot house on quarter-acre lot (about 10,000 square feet) – a starter home or end-of-life home. The basic rental need for a single person, two people splitting a rental, or two people with a child. Location will be North Carolina in the Charlotte area.

Part of the reason pricing has soared this year is many landlords have been held to pricing for two years because of COVID, so three years of price increases have hit at once. In addition, many have been unable to evict non-paying tenants, while the cost of ownership has not changed, so they have been bleeding money to keep heat on and the roof not leaking. The other end of the price-increasing stick is many landlords have joined the bandwagon of raising prices because prices are raising. (Yes, that is a circular logic sentence.)

To start, I need to know how much a house should cost. Which means I need to know how much it would cost to build a small home. Land is valued at $10,000 to $20,000. A new mobile home about 1,000 square feet (single/double wide) runs about $50,000 to $75,000. A custom-built home for 1,000 square feet runs $100,000 to $200,000 – this includes appliances. (Copinger, 2022) Usually custom-built homes costs more than existing houses because people are getting exactly what they want and are investing in the best and safest products of TODAY for their personal tastes; no hidden asbestos or lead paint issues.  Times are strange and the gap of pricing which used to be about 30% higher to custom build, has closed to 15%, and in some places in America, flipped making new cheaper than used. (Caginalp, 2022) Let’s go with a new cheap, rentable house should cost $110,000 built new before the overpriced market is taken into account which has pushed it up to $150,000.

Second part of this exercise, before we figure what a rental should cost, is what is the actual cost of home ownership. I have found over the years, maintenance of a home runs about 3.5% of the cost of the house on average over the years – some years the roof needs replaced, other times a broken window needs fixing. Basically every 30 years, a homeowner, to keep up the condition of the home, needs to plow the cost of the house back into the house. (For example, my home was built before grounding three-prongs were required in the bathrooms.)

Truth is, though, most people don’t have time to maintain their houses while holding down the jobs of TODAY. (That rewriting for proper grounding isn’t getting done anytime soon for my home. Not until the mortgage payment drain goes away or I retire and figure out how to do my own wiring.) So many houses are sold in need of repair at 20% under market value – sold to house flippers who put in the grunt work of their time to fix the land, windows, paint, that the previous owners have neglected. This exercise is about true home ownership cost, and it costs 3.5% a year to maintain a home. At $110,000, that is $3,850, or $321 a month.

Then property tax ($1,000 a year), home owner’s insurance ($1,000 a year), and utilities – phone, electric, heat, water, wi-fi ($250 a month). To own a completely paid off home cost $738 a month, if it is being maintained. Plus about 3 hours a week upkeep, mowing the lawn, taking care of the yard, fixing little things about the house.

If working on paying off a mortgage, cost would be an additional $350 or so, depending on the interest rate and payoff range. Total home ownership is $1088 the first 30 years, then $738 thereafter in today’s dollars.

Part 3: The Exercise – A House as a Rental

For the landlord, let’s assume generational wealth means the property has no mortgage. The landlord is renting the mother-in-law house after her passing. Still, the property costs $738 a month plus 3-hours-a-week to prevent it from falling into disrepair.

Third part of this exercise is figuring out what a person working on the rental property should make. That 3-hours-a-week someone is putting into the house, above basic cleaning (a renter’s responsibility). This would cover a mowing company coming every two weeks, or fixing a broken light switch, or having an exterminator come by. A handyman or jill-of-all-trades, as a self-employed individual, costs about $15 an hour depending on the licensing and tools required for the jobs.

That is an extra $180 a month cost that a landlord needs to collect to pay for all the things a homeowner normally would deal with that is the landlord’s responsibility. Now, the landlord may choose to mow herself instead of paying a mowing company $100 a month, but she is spending 6 hours of her time doing the mowing. Basically, she is being a self-employed individual doing the work of her business. Either she pays herself $100 for her time and tools transported, or she pays the mowing company and uses her time elsewhere.

Total bare minimum ownership cost is $918 per month, $738 a month plus 12 hours of expert (paid) work.

Now switching hats from basic ownership costs to landlord cost.

The landlord will need to either do the business end of the rental work, or hire a property management company to work it for her. They charge about 10% of the cost of the rental … since cheap rentals are $1,000 and I think I’m going to end about there, they would charge $100 a month. What they are covering is the bookkeeping costs of making sure the property tax and insurance gets paid, the utilities are paid, inspecting the property on occasion, and the process of hiring all those special self-employed people (like the exterminator) – in additional finding a tenant (advertising), maintaining the contract, and collecting rent. That comes to about 5 “hours” a month – and that is about the time a landlord would have to personally spend per month do to everything. The property management company will take less time, thanks to the economics of scale – paying ten property taxes at the same time – but they have more people they need to pay. Basically, a landlord’s choice to hire a property management company instead of personally doing all the management work is a break-even option; does she want to put the 5 hours in per month, or does she need her time spent elsewhere – like her own day-job or taking care of a sick relative (that mother-in-law moved with her son and the landlord).

Total is now $1018.

Only thing left is the return-on-investment. Why would a landlord do all this just to break even? $1018 is breaking even … doesn’t even pay off a mortgage. Investors, business owners, people risking their family’s property and money, need a benefit to do so more than breaking even. Investors for low-risk activities (of which property rental counts) want a 3-5% return on investment, medium risk – want a 7-10% profit (think operating a business franchise), and high-risk activities want a 25% or more profit on the initial investment (angels investing in new companies). In this case, the investment is the house – $110,000. A 3% ROI would be $3,300 – or $275 a month.

Most landlords use the ROI to payoff a mortgage, slowly getting to the point of owning the property. They do the behind-the-scenes work to the tune of 17 hours a month … per property, to increase what they are setting aside.

So a good landlord, who is maintaining a two-bedroom, one-bathroom (cheap older) house in good standing for their renters, while making enough money to make it worth their time to jump through all the hoops of renting, should charge … $1293 a month.

Which is what the going rate for rental houses in the area. This total includes all the utilities and fixing appliances. If a renter takes over some of these tasks, like mowing the lawn or painting a room, or if things aren’t included like the electric, phone, and wi-fi, then the monthly cost should be lower. If the landlord isn’t repairing things in the house, then the price should be lower. But a solid, lower-middle-class rental, $1200 is a reasonable price for a two-bedroom house at the moment.

Swap out for a cheap mobile home (still the same size as the rental house) – lowering maintenance and ROI needs – and the price drops to $1020.

The gross income needed for $1200 rent? Remember housing should be 30% of gross – or $48,000 income per year.

Part 4: Closing Thoughts

It really hit me while doing this exercise that Rentals MUST cost more than home ownership. Because you have all the cost of the house, PLUS running a business on top of it. Even landlords need to be paid for their time if they are doing their job right.


Caginalp, Ruben. “Is it cheaper to build or buy a house?” 3/23/2022. Last viewed 8/13/2022.

Copinger, Kaitlynn and Amber Taufen. “How Much Does It Cost to Build a House in 2022.” 3/31/2022. Last viewed 8/13/2022.

Leonhardt, Megan. “Use the 30% and the 28/36 rules to figure out how much you should be spending on housing.” Make It series. Updated 7/15/2021. Last viewed 8/13/2022.,like%20heat%2C%20water%20and%20electricity

“North Carolina Fair Market Rent for 2021.” Last viewed 8/13/2022.