The only way to know if you’re getting a good deal when investing in real estate is to run a comparative analysis, also referred to as a comp. The internet makes this very easy. You can look on RedFin or Zillow and see other properties that have sold and are both recent and similar to the property you are looking to acquire.
Redfin lists these properties at the end of every home listing they have on their website.
This, of course, is simply an estimate. You won’t know exactly how much your home is worth until after you get a third-party appraiser to run their own numbers. You won’t know exactly how much your home will rent for until you actually put it on the market.
However, you can get a pretty good idea and get pretty close to your ideal numbers just by looking at similar properties online.
There are rules that investors use to gauge whether or not their real estate deals are good ones. I don’t swear by these rules. I consider them to be more guidelines rather than rules set in stone. Neither are these rules a substitute for a more detailed analysis of the property in question once you have decided to purchase it.
They give you a good idea about the kinds of properties you should avoid, and will help you narrow down your search and move things along more quickly, focusing on higher quality properties and weeding out the lower performing ones.
The 1% Rule:
The 1% Rule states that your monthly rent should be 1% of the property value or the price you paid for your property. For example, if the rental property costs $100,000, your monthly rent should be no less than 1% of that value, or $1,000 a month. A lot of investors bring up this rule and choose not to invest in properties that don’t meet the rule.
The 2% Rule:
Similar to the 1% rule, the 2% rule states that your monthly rent should be 2% of the total cost of the home. If the property costs $100,000 to purchase, then your monthly rent should be $2,000, or 2%. Obviously, 2% is much more desirable than 1%. In some markets, neither the 1% nor the 2% rule is possible. In some markets, 2% might just be the norm, given the economy, the state of the real estate market, rising rents, and low-interest rates.
The 50% Rule:
This rule states that your rent should be high enough that 50% of it can go to covering expenses. That means that the mortgage payment needs to be less than 50% of your total monthly payments. Expenses covered by the other 50% include maintenance and vacancies, among other things. In order to turn a profit, your mortgage payment on the property needs to be less than 50% of your total payment. If your rental income is $3,000, your mortgage payment cannot be more than $1,500, or 50%.
The 70% Rule:
This rule dictates how much you should pay for the property, considering after repair value (ARV). If you know that your home will appraise for $100,000 after repairs and that repairs will cost $20,000, your ceiling for buying the house should be 70% of ARV minus repair costs. So 70% of $100,000 is $70,000, minus $20,000, and your purchase price for the 70% rule is $50,000.
This rule leaves you with a buffer, and a conservative one at that, for repair costs. By utilizing this rule, you leave yourself enough room for anything that might come up during the renovation process.
