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How to Determine the Best Price to Pay for a Rental Property
Most investors who want to be landlords look to buy investment properties by going through the net return on their investment. There are faster and simpler methods to get the same result and automatically have a substantial return from the investment.
Let's first say there's two reasons for income from rentals that investors should be taking a look at - the multi-family conventional rentals and single houses (SFHs). The SFHs historically weren't designed to be rentals though the condition of the housing market and the economic conditions using parts from the country dictate that SFHs are viable rental properties.
The benefit for SFHs over multi-family properties could be the expected appreciation in value in years in the future. So, besides the rental income to spend a home loan, the owner might be able to receive a positive cash flow from your rental income and acquire some tax benefits.
Multi-family properties will invariably trade depending on net rental income to the owner. The net income is simply the gross rental income for the year less any and all expenses to derive how much cash remaining to the owner. Three Disasters You Can Avoid by Using a Property Management Company include, but are not restricted to: mortgage repayments, property taxes, vacancy (non-income), maintenance, property management, and utilities or even paid by tenants.
Historically, a guideline for pricing rental income properties was that certain percent each month with the mortgage or final cost yielded the owner approximately 10% return. It was then up to the property owner to carefully control his costs to have a reasonable return on his invested money. This rule-of-thumb was later raised from what became referred to as the "2% Rule". But rising property taxes costs have recently inflated the ratio to 3 percent (3%).
To exemplify these basic guidelines, let's look at what these percentages mean:
1. The 1% Rule signifies that on the $100,000 final cost, the master should receive at least $1,000 30 days rental income.
2. The 2% Rule implies that on a $100,000 purchase price, the property owner should receive a minimum of $2,000 monthly rental income.
3. The 3% Rule signifies that over a $100,000 final cost, the property owner should receive at the very least $3,000 per month rental income.
While people might state that $3,000 a month rental income on a $100,000 property is impossible, it's not and that we are buying tri-plexes and quad-plexes at these levels with a regular basis. A SFH that sells for $100,000 might bring in $1,250 monthly rent and so the investor has to decide about his final exit strategy - whether to obtain a cash flow and accumulate income properties or go for that appreciation in the event the market returns to former heights.
Usually, the trail that does the best for investors would be to do a minimum of one SFH in every three rental properties that this investor accumulates. In addition, it is rather beneficial to establish a high cash flow by wholesaling properties the investor doesn't want to help keep. This gives the investor "chunks of cash" short-term (wholesaling), steady income monthly (rentals) and builds a pipeline of SFHs to be sold within the years into the future.
My Website: https://splice.com/jordangarcia01
     
 
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