Posted by Jason Colon in As featured on eHow.com.
Thinking of buying a rental or investment property? Success in real estate investing depends on identifying acquisitions and diligent work to realize their full potential. The key is to be an investor, not a speculator. Here are a few tips to make sure that you are on the right track and to help you achieve a high rate of return with your investment.
1. Have a Plan.
Are you looking for single- or multi-family properties? Are your investments long or short term?
2. The Deal of a Lifetime.
Resign yourself to the fact that the “deal of a lifetime” comes along a few times each month. Never fall in love with an investment property. Investing in real estate is primarily a numbers game and you must stay focused on the numbers.
3. Find a Realtor.
Find a realtor who understands your needs. Make sure the realtor knows that you’re an investor looking for an investment property. You plan to look at a lot of properties, potentially making many offers, before purchasing.
4. Choose an Area.
Pick an area near you and know it well. Have a good understanding of the rental market for the area you pick. What are rents for one, two, and three bedroom single family homes? What about apartments? Is the rental market hot or cold? Some indications of a cold market could be lots of “For Rent” signs or “freebies” (i.e. one month free rent.)
5. Quick and Dirty Calculation.
Run a “quick and dirty” calculation. As a general rule of thumb, the monthly rental income should equal 1% of the purchase price. For example, you should expect to receive at least $1,000 in monthly rent on a $100,000 property. This will help to ensure a positive cash flow after all your expenses are paid.
6. Thorough Analysis.
Run a thorough analysis. Consider the same $100,000 property, with a monthly rental income of $1,000:
Gross Annual Rental Income = $12,000 ($1,000 x 12 months)
Vacancy allowance 10% = $1,200
Expenses 15% (e.g. utilities, advertising, maintenance, etc.) = $1,800 ($150 per month)
Mortgage on $80,000 (assumes 20% down payment) = $8,400 ($700 per month)
$12,000 – 1,200 – 1,800 – 8,400 = $600 Net Income
$600 / $20,000 = 3% ROI on your down payment of $20,000
Not a very good return on your $20,000 investment – especially when you consider the inherent risk with rental property. Unless there was an opportunity to increase rent, you might pass on this property.
Now consider the same property with a monthly rental income of $1,200 (a $200 increase). This rental income would produce a Net Income of $3,000 annually – a 12% ROI on $20,000. A much better investment!
7. Make an Offer.
When the numbers make sense, make an offer. If you already own a home, the process from here on is very similar to purchasing your first home. Once an offer is accepted, be prepared to have a home inspection and to engage your lender.
