How to Evaluate a Rental Property in 60 Seconds
When you start looking for a rental property to buy, you might find yourself overwhelmed by all of the places that are on the market. Your realtor may be sending you a bunch of listings, and you may have a list of properties you’ve found on websites like Realtor.com. How do you know which ones are worth looking at further?
I use a simple calculation to make a quick decision, and it saves me a huge amount of time. When my husband and I look at a spreadsheet of potential properties to buy (that is how we compare opportunities), I will tell him which three or four we should look at closely in less than five minutes. He will spend hours going over the details and analyzing the numbers only to come to the same conclusion as I did.
So, what’s my trick?
All you need are two numbers: the price of the property and the rental income you will get from it each month. If the monthly income is at least 1 percent of the purchase price, it’s worth investigating further. If, for example, you have a property that costs $300,000 and it gets $3,000 per month in rent, it’s highly likely you will get positive cash flow from it. And that is a key ingredient to successful real estate investing.
You can even drop the 1 percent to 0.8 percent, and you may still have a positive cash flow property. One percent is just a rule of thumb. You can decide on the exact number you’re looking for based on your objectives, the strength of the area where you’re buying, the size of the down payment, and the cost of financing.
Once you’ve found a property with cash flow potential, you still have a lot of work to do to make sure it is a good one to buy. But by using this trick, you won’t waste time running the numbers on properties that don’t have much potential to be a good deal.
