How do you know if the rental property you are getting ready to sink your money into is a good investment? To start, you can crunch a few numbers that give you some solid indicators of a rental property's viability.
Yourproperty management company can help you identify some good buys by utilizing the proven investment formulas below. A seasoned professional knows how to interpret the numbers and use other data that will allow you to maximize your profits and secure quality tenants.
Let's look at some ways that you can determine if a property is a good investment. If you have any further questions, then feel free to contact Everest Property Management.
Use a Classification System
Any property you want to invest in can fall into a classification system. You can work with your property management company to develop a classification system depending on your criteria. A classification may look something like this:
CLASS A | CLASS B | CLASS C |
|---|---|---|
| New homes | Older homes | Oldest homes |
| Highly valued amenities | Some valued amenities | Zero amenities |
| Tenants with high income | Tenants with mid-range income | Tenants with lower income |
| Low vacancy rates | Rentable but occasionally vacant | Stays on the market |
| Luxury features | Value-added investment opportunity | Few, if any, desirable features |
| Prime location | Decent location close to town | Poor location |
| Few maintenance needs | Needs some maintenance | Requires significant maintenance |
Use the One Percent Rule
The one percent rule is easy to understand and use. The one percent rule is as follows:
The monthly rent equals one percent of the purchase price of the property. Thus:
- A $100,000 property rents for $1,000/month.
- A $200,000 property rents for $2,000/month.
- A $300,000 property rents for $3,000/month.
If the property has the potential to meet the one percent rule, then you should consider it as a sound investment. If it falls below the one percent rule, then you should probably keep looking for a new property. Keep in mind that you will need to add all repairs and other expenses to the asking price of the property before you apply the one percent rule.
Consider the Cap Rate of the Rental Property
The capitalization rate, or cap rate, measures how much cash flow you can expect compared to the property's overall value. The equation is simple:
Divide the operating income by the purchase price of the property.
Here's an example:
You just purchased a house for $100,000
- Your charge rent at $1,000/month
- Thus, your annual gross income is $12,000.
- Add up your annual operating expenses. The total is $4,000
- Subtract expenses from income to get your net income: $12,000 — $2,000 equals $10,000.
- Now divide $10,000 by $100,000. Your cap rate comes to %10.
A typical favorable cap rate lies somewhere between 4% to 10%. However, you can optimize your cap rate by comparing your rental property to other properties in the area.
Your cap rate of 10% vs. comp cap rates of 7%: You have a good property.
Your cap rate of 10% vs. comp cap rates of 14%: You may want to keep looking.
Your property management company monitors the cap rates of properties across Palm Coast, Florida and other areas daily. Therefore, you should be able to gather this information quickly by consulting your Everest PM specialist.
Conduct a Rental Market Analysis with Your Property Management Company
Your most valuable resource for finding the best rental properties in Palm Coast, Florida is your property management company. Everest PM can work closely with you to determine which properties will give you the highest ROI. One of the most methods that we use for accurately identifying investment opportunities is a rental analysis (A.K.A. rental marketing analysis).
An analysis gives you a complete investment profile of any property that you have in mind. There are five basic steps to a rental analysis:
- Evaluate the neighborhood based on access, area amenities, business development, job opportunities, school ratings, etc.
- Identify comparable properties according to square footage, bedrooms & bathrooms, lot size, property condition, amenities, and vacancy rates.
- Calculate the price-per-square-foot of comparable properties versus the price-per-square-foot of your property.
- Adjust the rental price of your property according to on-site or local amenities.
- Determine the cost of comparable properties for sale in your property's area.
Property Management Services in Palm Coast
Everest Property Management is a Palm Coast-based company that helps people find homes to rent and manages properties for real estate investors. We work with investors to identify investment opportunities in the Palm Coast area. By partnering with our property management experts, you can get a higher ROI out of your property.
To find out more about our products and services, call us at 386.246.2085. You can also message us on our contact page.
As a top producing Realtor and Property Manager; Terry specializes in sales, extensive construction homes, rentals, REO’s, short sales, and all aspects of Real Estate. After graduating the University of Michigan with a master in MBA, Terry continued his endeavor and now has over 15+ years of experience in the Real Estate world. If there is anything that has to do with Real Estate and sales, you can always be sure of Terry to provide important, specialized knowledge.
