If you are an aspiring investor, then one of the biggest questions that may be on your mind is whether or not the property you are interested in is actually going to turn out to be a good investment. Well, the good news is we are here to help you with the real estate math.
The One Percent Rule
If you are on the hunt for amazing investment properties, then you most definitely have a ton of options to weed through. Instead of making things more complicated than they need to be, we are going to simplify the one percent rule.
A property you are considering as an investment should rent out for one percent or more than its total upfront cost. This means that if a property is $100,000 for example, the rental amount should be set to at least $1,000 per month. To determine the total upfront costs involved in the investment purchase, you need to add the purchase price, all closing costs, as well as a good estimate of any repairs that may be necessary for it to become available as a rental.
The Cap Rate
As soon as you have been able to narrow down all your options, you can take a closer look at the capitalization or cap rate. It is what helps you determine the return you may see on the investment property.
Simply divide the property’s net operating expenses by the total purchase price. When calculating this, you shouldn’t include the mortgage payment if there is one, as part of your operating expenses. Find your gross income (take the average monthly rent and multiply it by 11.5) and then subtract the operating expenses for each month to get your net income amount.
The Condition of the Property
One of the more obvious ways to determine if a property may be a good investment is to look at the condition of the property, along with how it is being presented. If you can’t locate any photos of the property online, then you can probably assume that it lacks the curb appeal that will get you interested. Not having that curb appeal may also lead to discounts on the purchase price. Definitely, something to remember as you search for the next big deal.
As you can see, once you narrow down your many property choices, there are a few good ways to determine if it will be a good investment and worth your time or if it will flop and cause more aggravation than you need. Hopefully, we were able to help you pin down the real estate math to make it that much easier.