One of the most common questions I hear is actually one of the hardest to answer: “how do I know if a property is good to invest in?”
Still, when looking at a potential property, it’s safe to say that the number one question you should be asking is this: Will this property create the type of cash flow (now or in the future) that will help me reach my financial goals?
Today’s episode will help you narrow your financial goals and teach you how to apply the 1% rule as you navigate through making a wise investment decision.
The 1% RULE can be realized when the rental income per month is > 1% of the Property’s Purchase Price.
Does your potential property investment pass the 1% rule?
Now, let’s look at what we discussed in this episode:
- Determine your financial goals
- You make money when you buy
- Define cash-flow
- Income vs. expenses
- The importance of knowing the “rent roll”
Here’s a breakdown of how this episode unfolds…
Before setting out to invest in real estate, your first step is to seek understanding of how you want to secure financial freedom. The second step is to determine your goal in how much passive income you’d like to create per month and in what time frame you’d like to have it. Do your due diligence, research, become knowledgeable in understanding the process for passive real estate investing.
It takes practice and education to know if something is the right property for your hard-earned income. Remember, most of the important work is done upfront before you invest.
Cash flow refers to the amount of money flowing through your finances. Minus your expenses. What is leftover becomes your net cash flow. What you want is to have positive cash flow.
The income bucket from property refers to rent, utilities, laundry, parking, etc. In contrast, the expense bucket refers to the management company, maintenance, repairs, and capital expenditures to keep the property upgraded. Expenses also include taxes, mortgage, lawyer fees, and even pest control. These expenses need to be considered in determining if the property will produce a positive cash flow.
Therefore, you need to do a deep dive into due diligence. Ask the seller for a “rent roll.” This is essentially a list of the leases and actual rents that have been collected over the past year. Then, to calculate expenses, you’re going to want to see all the seller’s records, including maintenance and taxes.
Due diligence in several properties takes an enormous amount of time. This is where the 1% rule applies, meaning that you should be looking for properties where the rent per month is greater-than-or-equal-to 1% of the purchase price of the property.
The 1% rule gives you a basic idea of whether the property at hand will be able to create a positive cash flow situation or not.
To calculate whether the property fits the 1% rule, it is best to use actual rents from the “rent roll,” or on occasion, the sellers will list actual rents on the listing itself.
The 1% rule is just one rule of thumb that can help you quickly narrow down which real estate investments might get you to your ultimate goal: true financial freedom.
We want to hear from you….
What is your story of studying the metrics to make a well-informed investment decision?Leave a comment below!
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