Property Investing: 3 Rules for the Busy Investor
As the old real estate investing axiom says, you must “make your profit when you buy.” While your investing career won’t start with a big fat check right out of the gate, the checks will start rolling in eventually if you implement and follow the right strategies.
All that “profit when you buy” really means is that you must “buy smart.” You need to buy a property at a price that allows you to maintain a profit after executing your planned exit strategy. No amount of hoping, wishing, or sweat equity is going to salvage a property investment that you vastly overpaid for.
You’ll never be able to perfectly predict the future of the housing market, but you can know what the market is doing today. To keep pace with the day-to-day developments in your local market, here are three simple rules of thumb to help you rapidly evaluate listings and uncover great deals.
The Two Percent Rule
When deciding the monthly rent of your investment property, two percent of the purchase price has traditionally been a good rule of thumb. If the home cost $150,000, then the rent should be $3,000 per month. It’s a simple guideline that should probably be thrown out in some circumstances, but it’s a useful way for investors to calculate potential cash flow of a property quickly when their weighing many options at once.
The 50 Percent Rule
According to this rule of thumb, you should expect 50 percent of your income to go toward expenses. Many listings will tell you the monthly income of the available property. Simply taking that figure and dividing it in half gives you a fairly accurate estimate of the money you’ll have to devote to utilities, insurance, taxes, repairs, vacancy costs, turnover costs, and more. Paying the monthly mortgage payment is all that’s left for your remaining 50 percent of income.
The real value of the 50 percent rule is that it teaches investors to account for the little mundane details that sometimes add up to surprisingly high bills. You might not require repairs for months at a time, and then, boom, you need a new roof. Setting aside 50 percent for expenses ensures that you’re prepared when the big ticket expenses arise.
The 70 Percent Rule
Investors follow the 70 percent rule to determine the maximum ARV (after repair value) price of a property. This is a guideline that is especially relevant for house flippers, but almost any investor can use it to uncover some good deals on the market. The rule of thumb says that you should only offer up to 70 percent of the listing, minus the repair costs. For example, if a $150,00 home needed $20,000 worth of repairs or improvements, you should offer $85,000 (150,000 X .70, – $20,000).
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