Epic Real Estate Investing - Signs That an Investment Property Is a Good Buy | 848

Episode Date: November 26, 2019

How do you know that an investment property is a good buy? Mercedes, our turnkey girl, reveals the 2 rules of thumb that prove whether a deal is good or not. Tune in and find out more! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. So you want to be a real estate investor, but you don't want to do the work. If there were only a way where someone else could do it for you, now there is. Tune in here each and every Tuesday on the Epic Real Estate Investing Show for Turnkey Tuesdays with your host, Mercedes Torres. Hello and welcome, welcome to Turnkey Tuesdays brought to you by Epic Real Estate Investing. My name is Mercedes Torres, your turnkey girl, and I help busy professionals acquire passive income through real estate investing so they don't have to work so hard and maybe retire even faster. So this show is to share tips and advice and real life real estate experiences so that you two can create passive income in your world.

That said, if this is your first time here, glad you made it. If this is not your first time here, welcome back. So one of the common questions I get on a regular basis is, how do you know if an investment property is a good buy? Well, after, I don't know, over 2,000 transactions, not all of my own, some for my turnkey clients, and some for our own portfolio, I must say that my two rules of thumb are to take a really good look at the numbers, specifically at the 1% rule and the return on investment. So I'm going to jump right into it and share with you what I look like or what I look for to help determine if my investment property is a good buy. Okay, so number one, let's start with number one, and that is the 1% rule. Now, I'm sure you've

heard this term over and over again, but when you start looking at investment properties, you'll likely have plenty of options to choose from. I mean, first, you have to decide, of course, what type of property you're looking for, let alone the strategy that you should already have defined before you embarked on this real estate journey. But rather than it being a complicated equation, the 1% rule is simply a rule of thumb, if you will, that investors use to help them narrow down the options more quickly and efficiently. It's a tool that you can use to determine if a property deserves a closer look, and that 1% rule says that the property should rent for 1% or more than its total cost.

So, for example, let's just assume you're looking at a property that all in is $80,000. That $80,000 property should rent for at least $800 a month. And if the property cost you $100,000, then the property costs you $100,000, then the property would rent for at least $800,000. then the property should rent for $100,000 a month and so on. If a property all in is $200,000, it should rent for at least $2,000 a month. Got it? Now, this is a rule of thumb, and it's taking into consideration the property's total upfront costs, meaning that you'll have to add together the purchase price, the closing costs,

and an estimate of the total cost necessary to make this property rentable. Okay, so make sure that you are adding all of those figures together. Oh, and even don't forget to factor in not only the rent ready repairs, but the marketing cost. So if you are going to do the marketing to place your own tenant and you're going to pay for advertisement, you want to include this number in your ballpark figure to get you the way. 1% rules. Cool? Awesome. Now, if the property passes the 1% rule, then it's worth considering. If it's close to it, it's worth considering knowing that you'll have to jump into some type of negotiation with the seller to make up the difference. But if not, if we're nowhere near,

then move on. Got it? Okay, cool. Now, the next very important, and by far my favorite is the ROI, the return on investment. So now, you find a property that meets the ballpark 1% rule, and you're seriously considering jumping in on this deal. The next step is to evaluate the true ROI and determine if this property is truly going to be a good fit for you. Now, keep in mind, everyone's number is different. Now, everyone's reason for investing is different. Everyone's Y is different.

So you need to be crystal clear on what that minimum ROI should be for you. Okay? I talk about this all the time. Know your numbers. It is critical that you know your number. So that number could be $1,500 a month of passive income. It could be $10,000 a month in passive income, or it could be your oldest child's college education.

So be crystal clear on that number because if we don't have a clear goal, a clear vision, we don't know where we're going. Now, that's getting off on another tangent. but just be crystal clear on what that ROI needs to be for you. So once you've narrowed down your options of the potential property or properties, hopefully you've got a couple in mind, it's time to really look at the return on your investment. This helps you calculate how hard your money is going to work for you. Now, the ROI is found by dividing the property's net operating expenses by the amount you are coming out of pocket.

So let's say you choose a home or an investment property and the purchase price is $100,000. But you decide to get a loan and you're lucky that you can qualify for a conventional loan, having to only come in with a 20% down payment to acquire this investment property. Meaning, the down payment for this $100,000 property will be $20,000 plus you have to factor in your closing cost. And roughly speaking, with today's money, your closing cost is about $5,000. Okay? So $20,000 for your 20% deposit plus $5,000 in closing cost, meaning you are all in for $25,000. So you can find the ROI by doing the following.

Step number one, calculate your annual rental income. So take your annual rent and multiply that times $20,000. Now, I like to multiply that times 11.5 because I factor in an extra two weeks of vacancy. Now, I usually have my tenants lined up, so I only have about a one week gap, but I've given myself a little buffer and I will do a two week gap and I multiply it times 12. Okay. Step number two, subtract your expenses from your annual rental income. And this is your cash flow. When we talk about expenses, we're talking about all the expenses, okay? Including your taxes, your insurance, your property management, all of that. Okay. Step number three, you add your equity bill into your cash flow. If there's

any, many of my properties do not have a whole lot of equity. I just choose to buy in cash flow markets. So the appreciation and the equity is very, very little. But this is going to be your net income. Now, step number four, you divide your net income by your total investment to get your rental properties return on investment. Super duper simple. Now, if you have a deal that you've got in your hot lip hands,

rewind this and listen to it so I can help you calculate your ROI. But there are calculators out there online for free that will allow you to calculate your return on investment and it will help you better determine the ROI of your investment property. Now, as I mentioned previously, each investor has his or her own measuring stick for determining an acceptable ROI, and this is where you need to be clear as to what's acceptable for you. However, generally speaking, you want this number to be as high as possible. I know making an investment is super scary, especially if this is your first one. However, numbers don't lie.

And if you're crystal crystal clear on your numbers and what your number is, then to determine, determining if your investment property is a good deal and is a good fit for you. Just be real with your numbers. I tend to be a bit more conservative when analyzing my own properties and you get to use your criteria of what's acceptable to you. But I just think it's best to prepare for sticky situations. So I try to be a little bit more realistic and a little bit more conservative because the one element of real estate that we really can't control is people. And as long as people rent our homes

or rent our investment properties and pay you rent, there's that little factor called human nature. And while most tenants get it and they play by the rules, you may have that tenant that loses this job and, well, this is why you have to factor in vacancy. So be very clear as to what numbers you're using to factor in. And it's always rule of thumb is to be just a little bit more conservative than we think, not over the top. Don't overdo it. Just be just a little bit more conservative. If you want to learn how to be conservatives in your calculations, or if you want more information on how I make this happen for myself, go to cash flow savvy.com and download the frustrated investors guide to passive income.

I mean, it's yours for free. I will catch you on the next Turnkey episode of Turnkey Tuesday, where cash flow is key. Your portfolio has seen better days. But this two shall pass. And the best for you is yet to come. Together, we'll get you there faster. We're cash flow savvy. And we'd like to share some information with you that will show you how you can take control of your financial future and accelerate its arrival.

Go to cashflowsavvy.com. More building, less waiting. Cashflow savvy.com. This podcast is a part of the C-suite radio network. For more top business podcasts, visit c-sweetradio.com.