Running a Rental Property Analysis… on a Napkin
The 2% Rule states that if the monthly rent for a given property is at least 2% of the purchase price, it will likely cash flow nicely. It looks like this: monthly rent / purchase price = X.
Here's a look at some of the most important things to consider if you plan to invest in the real estate market.
How to Analyze Real Estate Deals in 5 Steps
The One Percent Rule
This is a general rule of thumb that people use when evaluating a rental property. If the gross monthly rent (before expenses) equals at least 1% of the purchase price, they'll look further into the investment.
Members of the Forbes Real Estate Council weigh in on what to look for.
The 50% Rule says that you should estimate your operating expenses to be 50% of gross income (sometimes referred to as an expense ratio of 50%). This rule is simply based on real estate investor experience over time.
The 70% rule says that an investor should spend no more than 70% of a property's After Repair Value (ARV) on a property. This includes the price you pay for the property itself as well as any estimated repair costs.
The 2-2-2 rule consists of three easy steps: Every 2 weeks, go out for the evening. Every 2 months, go out for the weekend. Every 2 years, go out for a week.
There are four big reasons for this: it likely won't generate the income you expect, it's hard to generate a compelling return, a lack of diversification is likely to hurt you in the long run and real estate is illiquid, so you can't necessarily sell it when you want.
Your New Rental Property Will Appreciate in 2020 and Beyond
While price growth has slowed down some in different real estate markets, investment properties will still continue to increase in value. Zillow puts the average real estate appreciation rate of property in the US housing market 2020 at 2.8%.
With mortgage payments to contend with and a tough competition, you may only be able to profit $200 to $400 per month on a property. That's $4,800 a year, a far cry from the $50,000 we're talking about for earning a living. You'd need to own over 10 properties profiting $400 per month in order to reach that target.
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