Real estate investing can be a fantastic source of passive income for anyone looking to increase their revenue. Those interested in becoming a landlord can find themselves in a satisfying and lucrative domain that is relatively easy to set up and provides many advantages.
Through leverage virtually anyone can buy property without breaking the bank. By taking advantage of this simple trick, you can set up a down payment that is usually much lower (most often set at around 5-10%) than a traditional mortgage (generally 20-25%), and then slowly pay off the remainder of the balance with interest over many, many years.
While you might reap the financial benefits of a good rental for years without too much effort, it is of paramount importance to invest in a property that will actually show returns. Thus, it’s crucial to purchase real estate that you know for certain you can profit from in the long run.
But how can you determine whether a property is a good real estate deal or not? First and foremost, you should always look at zoning and liens, because this aspect is just not worth compromising on. Let go of your lofty, HGTV-type expectations and set realistic goals in your quest to find the ideal real estate investment. Check out the health of the roof line to get a sense of the general condition of the home and its potential to be presented in an appealing way to future lessors.
If all these aspects seem much too subjective in your decision-making process, you should opt for the best parameters to help you in this regard: simple mathematics. There are a myriad of ways through which you can calculate the profitability of a rental property and one of them is the 1% rule of real estate investing. This simple computation is easy to understand and can help you evaluate rental properties.
The 1% rule of real estate investing states that the monthly rent of a property should be 1% of the all-in purchase price. Put simply, the gross monthly rent should not be below one percent of the home’s final price, which includes not just the purchasing value, but the costs of any type of urgent repairs as well.
Let’s see a few examples to help you understand the calculations better: when purchasing a property worth $100,000, you should be able to rent it out for at least $1K per month in order for it to turn a profit later on. On the other hand, if you buy a home for $100K and need to do $50K worth of urgent repairs, you should rent it for at least 1% of your total investment, which in this case should be higher than $1,500.
If you do the math, you’ll see that with the help of the 1% rule, your real estate investment should turn a profit within 100 months. So after eight years and four months, all your investments will be paid on fully and from that moment on you’ll be able to profit from it on a monthly basis. This is quite a reasonable timeline, considering the benefits you’ll be able to enjoy for years to come.
In order for you, the landlord, to break even on the property, the charged rent should be at least equal (but preferably higher) than the investor’s mortgage payment. You can best establish the base level of required monthly rent by multiplying the purchase price of the home, adding any type of repair costs and then calculating the final sum’s 1%. This way the initial investment will not only pay itself off along with interest, it will also bring you reliable earnings in a few years time without too much effort.
Besides the 1% rule there are other indicators that can help you establish the profitability of real estate investing. Some use the 2% rule in their calculations, which is similar to the previous computation and states that you should only invest in rental properties that will rent for 2% of the purchasing value. The gross rent multiplier showcases the amount of time it will take for you to pay off your investment by dividing the borrowed sum by the monthly rent.
The 50% rule states that the expenses for any given rental property will add up to about half of the monthly rent’s value. The 70% rule proclaims that investors should spend less than 70% of the listing’s estimated value once repairs are done.
Before investing in real estate, make sure you do a thorough examination of the condition the home is currently in, calculate the repair costs that will turn the listing into a desirable asset and trust your intuition regarding the profitability of the property. All these are fantastic indicators of real estate investing, which will only be solidified if you run the numbers and estimate the return of investment with the help of such indicators as the 1% rule.