When investing in real estate, the goal is to put money to work today and allow it to increase so that you have more money in the future. The profit, or return, you make on your investments must be enough to cover the risk you take, taxes you pay, and the other costs of owning the real estate, such as utilities, regular maintenance, and insurance.
Cash Flow Positive Properties
A significant portion of investors buy properties that are cash-flow negative or have very low investment returns. That means the buyer puts in their equity cash capital when they purchased the property, and they are still investing additional funds each month, which could go on for decades depending on how bad of a deal they purchased. The better way to invest is to buy properties where the rents minus all the expenses, including the mortgage payment, provide positive cash flow that you can deposit in the bank.
The 1 Percent Rule
A simple way to do a quick analysis is to take the conservatively estimated monthly rental income and divide it by the purchase price of the house. You still need to pencil out your deal with rents and actual conservatively estimated expenses, but this back-of-the-napkin test is a quick and easy test to see if it makes sense.
Good Quality Properties
Smarter investors work hard up front to find the good areas where the rents provide a nice positive cash flow and investment returns, low crime rates, better schools, and decent amenities nearby like parks or retail. Coupled with good tenants who have excellent credit, you also create low vacancy rates. Smart investors also buy properties that are in decent shape, although every property needs paint, carpeting and some plumbing and electrical work from time to time. Do that hard work upfront and spend the money to put your properties in very good shape, you’ll get a little more rent and probably have a bigger pool of interested tenants from whom you can then choose. Lastly, do your homework, talk to other investors, read guides and books, shop properties, pencil out deals and have a long term ownership plan. Hopefully it will translate into a nice cash flow retirement picture.
RE/MAX Realty Professionals—The Results Team—is ready to help you buy or sell your home! Visit www.calltheresultsteam.com. Or call Lesa Miller at 812-360-3863 and Jenivee Schoenheit at 317-258-0995.