First 5 Rules of Investment Real Estate
1. LOCATION - When I
first started learning about real estate, I was quickly taught about the first
three rules of real estate investing.
They are 1. Location 2. Location and 3. Location. For this article, we will only list location
as the #1 variable to consider but it just goes to show you that you cannot
stress the importance of location enough.
The same exact building could be a great investment in one area and a
terrible one in another. Therefore,
before you ever even think about investing in a certain property you need to do
your homework. Drive around the
neighborhood to see what the area is like.
Make sure that you do this during different times of the day so that you
can gain different perspectives of the property. List the reasons that a person would want to
live in this location. Is it close to
schools, shopping, the highway, ect.? If
you cannot think of very many reasons that someone would want to live in this
2. CASHFLOW – Buying a property with a negative cash flow can be a strain on you financially for years to come. Many properties have positive cash flows out there so unless there are some compelling reasons to do so avoid any properties that do not have a positive cash flow. To figure out a properties cash flow you really need to do your homework. Some of the numbers in your analysis you should be able to get almost exact; like water bills, taxes, rents, ect. For others you will have to use estimates to come up with a figure. Remember to error on the side of being overly conservative. It is better to be happily surprised then sadly disappointed. If your property still cash flows when you are using very conservative numbers then you are on the right track.
3. RETURN ON INVESTMENT (ROI) – Every investment property out there is unique. To compare different properties you should calculate return on investment so that you are able to compare them fairly. The higher the ROI on a property the better of an investment it will be. ROI can be calculated in a couple of different fashion for investment real estate but typically it is calculated as change in the value of your investment divided by your original investment. Therefore, if you invest $1,000 into something and it is now worth $1,100 your return on investment is $100 / $1,000 = .1 or 10%.
4. RENT TO VALUE RATIO – Before you ever buy an investment property you should know exactly what its rent to value ratio is. Rent to value ratio is calculated by dividing the total monthly rents by the price of the property. (If utilities are included in rent, you may want to make an adjustment for this) It is an old rule of thumb that you should look for properties that get at least 1% of the properties value in monthly rent. Normally the bigger the building the higher of a percentage you can get but there definitely are diamonds in the rough as well.
5. RENTAL HISTORY – When looking at a potential investment always try to gauge the properties rental history. Talk to current tenants and ask them how long they have been there for and if they have any plans on moving any time soon. Talk to neighbors and see how long tenants normally stay before moving out. You want to find a property that keeps tenants for multiple years because you will have less vacancies and less stress from filling vacancies.