![]() ![]() Same goes for VA borrowers who buy for $0 down! They can convert their existing residence into a rental property, and keep the 100% loan. If you buy a home that you occupy for only 3% down, you can keep that 97% loan when you convert it to a rental property. With rental real estate, you can often put only 25% down and finance the other 75%. When I invest in the stock market, I need to pay 100% of the investment up front. Real estate is an investment you can finance. If that isn’t enough to convince you, read this Business Insider article about what Warren Buffett’s investing philosophy, and investment real estate. ![]() Over time, you pay off the mortgage, which builds your equity and net worth. Rental rates usually increase each year, bumping up your cash flow. Appreciate the long-term advantages of owning investment property. Why so little return? Because it’s not about the short-term return. When I shop for investment properties, I am satisfied with $50 cash flow, and a cap rate of 3%. Many investors are satisfied with little to no cash flow, so long as they are not losing money each month. The numbers you want to see on a rental property cost analysis depend on your goals. Using the above example, the GRM is $150,000/$18,000 = 8.33 How Do I Decide Whether to Buy? Gross Rent Multiplier = Purchase Price / Annual Rental Income When the GRM falls below 6-7, the property values, rents, and appreciation are all low. A GRM between 8 and 16 is a good range, because the property value is still high, you can expect long-term appreciation, and you either break even or enjoy good cash flow. If a GRM is 17 or higher, the property is probably so expensive that you can’t collect enough rent to pay for it. In general, the higher the GRM, the more expensive the property. The Gross Rent Multiplier, or GRM, is the sale price divided by the annual rental income. In San Diego County, the average cap rate is approximately 3.5%. In the above example, the estimated capitalization rate is $9,720/$150,000 = 6.4% When you analyze a rental property as an investment, the property value is your purchase price.Ĭapitalization Rate = Annual Net Operating Income / Property Value The capitalization rate is calculated by dividing the annual Net Operating Income by the property value. Net Cash Flow = $810 Net Operating Income minus $570 Debt Service = $240 Capitalization Rate In a rental property cost analysis, Net Cash Flow is the Net Operating Income minus any debt service.Ī $150,000 purchase with 25% down and a 30-year fixed mortgage at 4.5% interest will have a monthly mortgage payment of $570. ![]() ![]() Net Operating Income = $1455 Net Rental Income minus $645 Expenses = $810 Net Cash Flow To use the previous example, based on $1500 gross rental income and $150,000 purchase price:Īny utilities not paid by tenant or HOA – n/a
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