A rental property is different from owning your own home. There are a lot of intangibles you want in your own home that are not required in a rental.
You can do a quick back of the envelope calculation to see what your capitalization rate is on the property if it you treat your investment like it was a rental.
The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.
First determine what the market rent is for the property and come up with an annualized rent roll. Then, calculate your annual property taxes and annual insurance expenses. Some property owners also use a 2% (as high as 5%) figure to determine the annual maintenance budget.
Assume cash on cash (no mortgage) capitalization rate. Add all of your expenses subtract from your rent roll to determine your Net Operating income (NOI). Calculate your Cap Rate.
It will be different especially if you have a lot of fix up costs but anything over 10% is excellent. 8%-10% is still quite good. $5%-8% is ok especially if you get a fixed 4% mortgage.
Avoid anything less but remember property values is all about location and if you can add significant value by doing your own fix up.
In the 90's I did a lot of 'flips' here in Silicon Valley and the value (and potential gain) was ALWAYS in your Buy. If you buy at the right 'value' price, you will pretty mush never lose money.
This is similar to buying value stocks. You buy at the right value price, you will do fine. With real estate, you can add value yourself by doing (or outsourcing) the fix up. For stocks, it's your management that is in charge of that 'fix-up'.
Good luck and if need be, pay a bit extra for the better location.
EKS |
