Evaluating your cashflow

All owner occupied real estate seekers should stop reading immediately.  This post contains no information in which you might be interested.  Just kidding.  You never know what life has for you down the road, right?  Let’s arm ourselves with a little knowledge that if nothing else, is a good conversation starter at cocktail parties.

So you want to buy a property, rent it out and have your tenants provide passive income.  That is an excellent plan and I highly endorse it.  Actually you should buy many properties and have the tenants provide you with large quantities of passive income so you can take that cruise you’ve always dreamed of.

To begin the process, you toddle over to Craigslist (because you find better deals perhaps with for sale by owner properties) and begin looking.  You have a general idea of rents in your area, but would love a tool to tell you at a quick glance whether you will make any money.

TA DA!  Introducing the 1% Rule.  That’s right, a ballpark sorter in the beginning of the evaluation process.  If your rental will bring in 1% of the purchase price on a monthy basis, you will cashflow theoretically.  It’s a ballpark which factors in maintenance, taxes, insurance, mortgage payments, etc.

Case study 1:  Buyer X purchased a house in Seattle for $265K.  It required no renovation.  What would he need to rent it for in order to make money?  That’s right.  You are a quick study, aren’t you?  $2,650 is the correct answer.  Buyer X currently rents the property for $1390.  Was this a good deal?  That’s correct.  Buyer X will not be going on a cruise.  Buyer X will be working his job so he can pay the difference.

Case study 2:  Buyer X purchases a house in Detroit, MI for $13,000.  House requires $6,500 in renovation, so he is all-in for …..$19,500.  What would he need to rent it for to make money?  Yes, you are right again!  Have a gold star and move to the front of the class.  He would need to have a monthly income of $195 to cashflow on this property.  The house currently rents for $850.  Did Buyer X make a good choice?  He probably thinks so!

Being from the Seattle area, let me tell you local readers who want to invest, this 1% rule will do you well.  It is extremely difficult to cashflow in Seattle because of the still outrageously high prices of real estate.  It is possible to find some bank owned properties with prices low enough to do so, but be prepared to put major elbow grease into them; good REO’s are still pricey.

Distance investing will reap good rewards and is not as difficult as you might imagine.  Stay tuned for some basic education in future blog posts or ping me:  ladydi AT diane-guest DOT com.

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