Buying investment property is a great way to make additional income for you and your family. Different investors use different calculation methods to determine if an investment is right for them. Before you make any large investments, take into consideration our rules for buying investment property!
Location, Location, Location
Yes, this has been said before, but this is a huge factor when buying investment real estate. You can change ANYTHING about a home, aside from where it is built. You need to find a neighborhood where people want to be. A great house in a bad area isn’t going to get you the profits you are looking for. So what do you want to see in a location?
- Convenience. Most people will want to get to the grocery store in a reasonable amount of time.
- Low crime. You do not want to have to deal with vandalism, theft or dealing with bad tenants you might find in a high-crime area
- No main roads. Nobody wants to hear traffic noises all day, or have high traffic in front of their home where children might be playing.
- No commercial property nearby. Commercial properties encourage noise, traffic, litter and vandalism.
- Proximity to schools. You will need to find a sweet spot as far as distance. Families will want a quick commute for their kids, however, homes adjacent to a school will often have lower property values. This is due to more traffic and kids loitering in the area.
- Things to do. You can tell it’s a good neighborhood if you see parks, shops and restaurants nearby.
Know Your Numbers
Different investors use different equations to determine if a property is a good investment. One method is to use your “Cap Rate.” The short version: The Cap Rate is your net income divided by the asset cost. So let’s say you buy a house for $150,000. You rent it out for $1000 and incur about $200 a month in expenses. You will net about $800 a month, or $9600 per year. You would then divide $9600 (your net income) by $150,000 (what you paid for the house.) In this example, you would end up with 0.064 or 6.4 percent return on your investment. You should have goals in mind, and if the property isn’t meeting them, then you should consider a different house!
Another method used by investors in the 1% rule: This rule states that a house you are renting out, should bring in 1% of your purchase price each month. This can change market to market, but it is a great guideline to use when determining the value of a house as an investment.
Some investors use a 50/50 rule to keep them on the right track. This rule states that 50% of the profits will go to expenses other than the mortgage. This includes repairs, taxes, and rental costs.
Don’t Get In Over Your Head
Maybe people get involved in flipping homes because it looks fun, or because they have seen it on TV. There is much more to owning a successful investment property. If you are not familiar with rehabbing a home, don’t purchase one that needs a lot of repairs. You will want to have an inspection done to ensure there isn’t damage lurking behind the walls. There is nothing worse than going to repair one thing and being met with 10 more things you found under the surface. Working and partnering with a like-minded team will help your investments thrive. If you are a novice investor, working with other people in the industry will help you to grow!