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
#1: Location
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?
You included some great math formulas to help analyze a property, along with some great advice. I will be using this math in the future as I look for a property. This is a great article. Thanks for sharing.
Thanks! The 1% rule is the most popular ones, I see a lot of people are using it the ffighting… it helps put thing in perspective. But also consider of sweat equity, remember you time to renovate counts too.
Great post, Vivianne – I wish I knew these with my first property I bought! I just knew I wanted to buy a rental house and ended up winging it. I bought in the wrong location (bad neighborhood) and the numbers are definitely not great.
Thank goodness that I do Ok on it – we’ve had the same tenants in there for about 8 years and we pretty much break even when all is said and done (though they’re paying down the mortgage, I get the tax breaks, etc.).
The good news is that I did much better with our second property (a duplex). And now I’m getting better with the numbers to know enough for when we buy our 3rd and 4th duplex.
— Jim
In all honest,y, I was sorta winged it also. I bought a duplex, with the intention to supplement my payment. I didn’t think I could turn my house (liability) into an income producing property at all (business).
Nothing better than real life experience. We can sit here and do math, but putting everything into practice takes a lot of time and patience. Also it takes time for me to grow up, build relationships, get the right connection, develop a certain skills. I don’t think my 18 yo self could have handle tenant complaints or able to draw up a commercial property contract within a few hours. (I later compare the contract to a friend, it was so similar that I felt pretty good for figuring out by myself).
Multi families are great, just like buying properties in “bulk”. Insurance, taxes, and interest are cheaper per unit, yet there isn’t much different in income vs single family. I like to buy and hold, so multi family works for me.
This is some very good information that I’ve never heard of but will consider especially now that I am looking into purchasing my second property.
To be honest, I am a little hesitant right now because the housing market has been soaring in my city and the nearby cities. How would you determine which location is good to buy in Vivianne? 🙂
McDonald founder was eating lunch with business students, and he asked them: “what business am I owning”, one student said “hamburger”. He said “no, I’m in the real estate business”. Until today, McDonald owns thousands of the best real estate corner at the most valuable real estate its restaurants are located.
I can’t tell you where is the best location, I know my town, I can buy the ones in the hood if it worthy of buying. But I generally choose near the university, it’s easier for me to rent to young people. My sister likes to rent to family with stable jobs, so does my brothers. And they are in the MidWest.
I like to buy houses that I think I could live there, close to freeways, or public transportation. I put myself in the renter s shoes.
I check on the real estate listing a lot in my area, so when I see a deal come up, I know I should get on it. And property in distress are usually have some major problems that need to be fixed, so sometimes you could run into lemons.
People ask me where do I start with real estate, I said I start with myself, control my spending so I could have start up money. Same goes with you, you said your city, the real estate is red hot, it’s red hot because you feel the price is out of your range. So, continue to save and continue to search for something that require some fixing, but not too major, so you can buy it for $50-300k lower than the going price around the same area.