Do the Numbers Work?
When an investor looks at a property to determine if it's a good deal, they are really applying some of their own formulas to rate each home. That's the best way to make a very complicated process easy and enjoyable. So read along to learn how to create your own formulas for buying a great rental property.
Your Formula Starts With You
What is your goal? This isn't meant to be a tough question, but like most people that are considering real estate as an investment vehicle, you want to make passive income and retire someday. That's a fine place to start, but let's make it an official goal by deciding on some specifics. How much revenue do you want to make in a given time period? To keep things moving, let's say that you want to make 100k on each property you acquire, every 5 years.
Acquisition Formula
Every home has a "sale value" and a "rental value". If a home is for sale for 100k and rents for 500 dollars per month, that's a 6% gross return per year.
Easy Math - Take your estimated yearly rental income and divide that by the purchase price. Your estimated yearly rental value is the monthly value multiplied by 12. After dividing by the purchase price, then you get a decimal number. Move the decimal place to the right twice and there you have it! This percentage is the yearly return on your investment.
Take a look at the math for our listing by 75 and George in Plano...
Determining YOUR acquisition formula starts with your goal revenue per year. Then I work with you to offer options for higher or lower annual rates of return. There are many components to consider in choosing the right investment property.
QUESTION: Why Would I Choose a Lower Rate of Return?
Investments are risky, no matter which type you choose. Real estate offers more control over the variables that affect consistent, predictable revenue. The more prestigious the area, the lower the rate of return. If the tenants have higher credit scores, more consistent income, and a history of stability... They will also have a MUCH LOWER chance of eviction. This is uncomfortable to think about for many investors, but there is always that possibility. Always start with safe investments with lower returns when building the base of your investment portfolio.
Gross Annual Return vs. Your Acquisition Formula
The easy math is great once you know your acquisition formula, but first, we need to dive deeper to customize our approach. Here are a few things I will cover with you during your first consultation...
- Self-management of properties (if possible).
- Evaluating potential pitfalls in property condition.
- Buying into an "Up and Coming" school district.
- Converting large 3 bedroom homes into 4 bedrooms for added revenue.
- Playing the "Market Deduction for Ugliness" game to save money on a purchase.
- Calculating soft costs.
Above all else... Acquire KNOWLEDGE before acquiring any property. It's never easy to dive deeply into a field of study, but KNOW that I will be here to help! Read more on our approach to investing here...
Timothy Henley
Broker & Texas Realtor
Lic # 0572885
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