How do you know if an investment property will be profitable? Rule Number One is STILL Location, Location, Location. After that, you can apply these rules:
The One-Percent Rule
The one-percent rule is simply a rule of thumb that investors use to help them narrow down their options quickly and efficiently.
All the one-percent rule says is that a property should rent for a minimum of one percent of its total upfront cost.
A 100K property should rent for at least $1,000 per month. A 100K property needing 25K in repair would need to rent out for at least $1250.00 each month and so on.
The next test for profitability is The Cap Rate. To find the cap rate on your property:
- Divide the property’s net operating expenses by its purchase price:
- Determine your gross income using the average monthly rent for your property; multiplying it by 11.5. This will show the maximum amount you can make from the property, taking into account a two-week vacancy for the year.
- Subtract your monthly operating expenses (utilities, taxes, maintenance) from your gross income to get your net income. Don’t include your mortgage payment in the list of monthly operating expenses.
- Divide your net income by the purchase price to find your cap rate.
- Multiply the cap rate by 100 to find the percentage of your potential returns on the property.
The cap rate assumes you’ve bought the property in cash which allows you to easily compare one property’s ROI to another. It is up to you to determine an acceptable cap rate, but generally it should be as high as possible.
For more ideas and advice on Real Estate Investing, please visit my podcast:
https://podcasts.apple.com/us/podcast/ep-026-real-estate-tax-geekout-session-w-bernard-reisz/id1604630028?i=1000613135242
