How do I know if an investment property is a good investment? This is the question I get asked most frequently and probably the most frequently asked question of relatively new investors.
The answer to this question is not very simple because of the number of variables involved in analyzing an investment property. Here are just a few of these variables:
What is the macro economic environment of the city where the property is located? (Is there positive job growth, net migrations rates to the area….)
What type of area is the property located in? Is it an A, B, C or D property class? Meaning, is it located in a more prominent area or a war zone and/or was the physical structure built within the last 10 years or in the early 1900's
What are the taxes on the property?
Are you looking for cash-flow or appreciation?
These are just few examples of the variables involved in analyzing an investment property you may be looking to purchase. However, FEAR not….., there is a 1 minute filtering test that can be used to gauge the likelihood of a property being a good investment buy. This 1 Minute filtering test is called "The One Percent Rule"
The One-Percent Rule
When you start looking at investment properties, you'll likely have tons of options to choose from and rather than wasting time and getting overwhelmed with complicated equation for every single property on your prospecting list, the one-percent rule is a simple rule of thumb that investors use to help them narrow down their options quickly and efficiently. It's a tool that you can use to determine if a property deserves a closer look.
All the one-percent rule says is that a property should rent for one-percent or more of its total upfront cost.
A property that costs $100,000 should rent for at least $1,000 per month
A property that costs $200,000 should rent for at least $2,000 per month
Please keep in mind that this rule looks at a property's total upfront cost, which means you'll need to add the total of the purchase price, plus closing costs, and an estimate of the total repair costs necessary to make it rentable. So a $100,000 property that needs $50,000 in work would need to rent for at least $1,500 per month to make sense, not $1,000.
If a property passes the one-percent rule, it's worth considering and you should take a deeper look at all the other factors in making your decision (check out our video on deal analysis for more details on analyzing properties).
Now if a property does not pass the one percent rule, does this mean it's not worth buying? Well, the answer here again is not that simple. For example, properties that are in better areas with low crime rates and better schools, typically come in lower than 1% but generally have better appreciation prospects over time than high crime areas. In these instances, if the 1% does not hold true but your investment strategy is looking for appreciate over time, it may be worth taking a deeper look.
Understanding how to analyze investment properties is an important first step in acquiring any income property. Check out our free deal analysis calculator at https://www.therealestateretirementplan.com/ to get help or watch our video on investment property deal analysis.
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