 RuskEnt 
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Joined: Jan 2005  NJ, USA
 Posts: 1457 Feedback: 100% (1) |
Posted: 5/4/2012 9:12:58 PM
THE IMAGE ABOVE IS A PAID ADVERTISEMENT How do you determine if a property is priced properly? I can buy a property with 4 units for 395k. 3 of the renters have been there for over 5 years. The property tax is 7k a year. The rental income is 49k a year. With these # can you determine if the property is priced somewhat accurately? |
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graysonp
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Team Member
Joined: Oct 2008 KY, USA
Posts: 3156 Feedback: 100% (51) Link To This Post |
Posted: 5/4/2012 11:05:28 PM
My suggestion would be to look at alternative investments and see what you could be making if you didn't buy this property. A diversified stock/bond portfolio will return about 6-7% annually on average with no work required. So a $395k portfolio would return about $23k-$25k per year on average.
In contrast, your rental property returns $42k/year (after taxes) on a $395k investment, which is 10.6% per year. That's a great return and will beat most alternative investments. Based off that information alone, it sounds like it could be a good investment. You' ll also need to weigh the additional risks of keeping/managing tenants compared to a more passive investment. And, if you can't pay cash for the property, you need to take all interest/finance charges into account. If you're paying 4% interest on the property, that cuts your net return down to about 6.6%, and now you're playing landlord for the same profits you could make in a simple stock portfolio. You need to consider maintenance, insurance, etc costs as well. What return is acceptable is really up to you, but there's no reason to take on a new job as landlord to make the same return you could earn with a passive investment. |
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Posted: 5/7/2012 9:39:27 AM
I would add you need to see the state of the property. Land comes with maintenance costs so you need to know pretty well what has been done and what is needed, and the tax implications of that. Some things are tax deductible some aren't.
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Posted: 5/8/2012 2:33:33 PM
You need more data on expenses before you can crunch all the numbers. Also, check the condition of the property - will you need to fix anything within the next 1, 3, 5, or 10 years that are notable?
Also, are you going to take out a mortgage on the property to buy it? That will factor in immensely to the potential profitability of the investment. Make sure you have every nickle and time included in potential costs outside of taxes before you calculate ROI. |
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Posted: 5/16/2012 10:37:23 PM
A good rule of thumb is to take gross rents and deduct 25% minimum. This will give you your net rent.
Now compare it against the payment of taxes, insurance, and any financing you will get. Is it still generating cash flow? If so, what is the cash flow per year compared to any initial investment you make. This is your rate of return. If you can get an acceptable rate of return, then its a good deal. Your goals and risk tolerance will tell you if this is a good investment for you. |
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Posted: 5/22/2012 10:50:32 AM
You can figure expenses of the property to be around 50% of the rental income. This covers vacancy, maintenance, taxes, insurance, repairs and so forth. You want the other 50% of the income to cover your P&I and hopefully leave you with $100 per door.
This is a very good rule of thumb to measure the deal. Here is a video that explains a little of the 50% rule. 50% Rule I own two rental properties at this time, I sold a third that I had a joint venture on to turn some cash. I am now looking to pick up a third and hopefully a few more. |
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