Demand is still high amongst the millennials, with nearly 4 out of 10 Americans paying a landlord instead of owning a home, the number of rental houses is surging. If you’re still worry that nobody is going to rent from you, you could always buy a rental near a big football university and you’d always looking at a whole football statium-full of potential tenants. LOL 🙂
Look! Homeownership is at the lowest since 1965 at 62.9%
So, if you decide to go for it, what are the thing you’re looking for?
The math behind a buy worthy rental property
#1: The 1% Rules the Lures
Only buy property that yields at least 1% or more of the purchase price (this should include purchase price and the minimum cost to get it rented).
Does the monthly rent equal one percent of the purchase price or more?
- A $100,000 property should rent for at least $1,000 per month
- A $200,000 property should rent for at least $2,000 per month
- A $300,000 property should rent for at least $3,000 per month
Most of my properties are renting higher than 1%. You can find the example here and here.
I bought the property for $285K, with renovations, taxes, insurance, and fees. The total costs is $310K. And I’m planning on making at least $4K/mo on 4 units. That is (4/310) * 100 = 1.29% Check.
The park front rental was $57K + $20K reno = $77K, renting for $1200 that’s 1.58%
#2: Net Rate of Return 6.5% or more
It is Net or Gross of rent divided by the purchasing price. (It’s a little more conservative to use net).
- A $100,000 property should rent for at least $1,000 per month (net $700). So ($700 x 12)/$100,000 = 8.4%
- A $100,000 property should rent for at least $1,000 per month (net $700). So ($1400 x 12)/$200,000 = 8.4%
- A $100,000 property should rent for at least $1,000 per month (net $700). So ($2100 x 12)/$300,000 = 8.4%
In my case, I bought $77K house, net $700/mo.
Net rate of return: ($700 x 12)/$77,000 = 10.9%
#3: Return of Capital (Cash).
If you’d only have $25K for $100K purchase price. And it rents for $1000 per month.
($1000 x 12)/$25000 = 48% . This is why people like Donald Trump is rich – leveraging.
**The reason, I use $25K down payment for $100K purchase price, because the bank requires investment property, you’ll need to put down $25%.
There, you have it! The math is DONE! and Done! Now you’d just go out to hunt for your property.
The key is *patient*. The second key is don’t rely on a realtor to do the searching for you. Search your own. I bought all four of my properties, base on my own search and research.
Three ways I use to get the market price for rent:
#1: I use zillow.com
Zillow has it good. I can filter the search to “Rent” from “Buy” and voila. I see 1 bedroom, 2 bedrooms, and 3 bedrooms in the same area are going for. And I only fix it to rentable unit, renters aren’t picky, there is no need for fancy faucet or stuff like that. Renters, they just need a functional, not leak kitchen faucet, etc. They would want to have a washer and dryer in the unit, so they don’t have to go to another place to do laundry, so I’d make sure to make those basic need. And because I didn’t use the nicest accessory, I can lower the price $300-600 than the top ends. So, my units will have an easier time to stay rented.
#2: Ask people who live in the area
There is nothing wrong with asking people how much they’re paying for rent. As long as you have good relationship with them. LOL 🙂 Or, in my case, I’d go eat at a restaurant nearby, compliment the food, ask to speak to a manager, found out my listing is 1/3 of the current market, that was why my restaurant space is rented within 1 week of me listing it.
#3: Ask your trusty realtor
I guess, the realtor will use their connection to find out for you. That’s probably the quicker way. And less costly (no need to eat at a restaurant nearby LOL:)
I had every intention to keep my $300K investment in stocks, but I was always on the look out for another rental. I search zillow.com (for residential, duplex) and loopnet.com (for commercial, 4-plex, mixed-uses, multi-units).
Things I’d always consider are
I’d like it close to my work (near downtown, university, and hospital). In my city, there are 15000 students, and the school doesn’t have housing for 15000 students, so I know some of the spilled over students would need private housing.
My hospital employs over 7000 employees, and not counting the contractors
My town has 1.5M people, and majority of businesses are in downtown.
So if I build my real estate empire around this area, there will be more chance for it to stay filled.
#2: Always buy Low
Yes, the real estate market is red hot right now, but good thing happen when you are patience. I’ve been looking for a commercial space for 2 years. People who look at me and and see I made the decision to buy so quickly and think that I make hasty decision. But that isn’t true at all. I know I had to make the decision quickly because I bought one for 1/3 to 1/2 of the going price around there.
#3: Only Buy Something You’d Want to Live in It
Yes, I saw the property and I fall in love with it immediately. Because when you are getting ready to sell, you’d need to live in it for two years, so that if the property appreciate less than $250K, you don’t have to pay capital gain on it.
Moreover, if you’re planning on to do any renovation to it, you wouldn’t want to be in the neighborhood where shooting, raping, and drug dealing is going on. So put yourself in the renter’s shoes.
I believe, if I can stick to these methods and rules, any average Jane or Joe can too. If you’re stick with me until this point, that means you’re interested, I wish you the best of luck.
What method did you use when you decide on your property?