The average adult makes approximately 35,000 decisions a day. Many of them are subconscious and seemingly inconsequential, however, there are some that could have major implications—such as where and how you choose to invest your finances. Real Estate is my favorite way to invest (here’s why.) Over the years, I’ve discovered a few real estate formulas that make it easy to choose what properties to invest in.
As a real estate investor, it’s important to focus on what makes you money. It is imperative that you review the deals when you look at properties. Crunch the numbers and follow these 3 real estate formulas. I promise they will simplify your decision-making process!
Real Estate Formula 1: Property values shouldn’t exceed 3 times the median household income.
When you consider investing in a certain city or town, survey the property prices and median household income of the area. Ideally, you want to find a market where the property prices are no more than 3 times the median household income. (If they are higher, this doesn’t mean you shouldn’t invest—the next two formulas can still apply.)
For example, let’s consider the median household income in Calhoun, Georgia–$52,342. The median home price is $132,955. This makes Calhoun a good place to potentially consider purchasing property because the median income is greater than the median price. That means that the median house is going to catch up to (appreciate) the median income at some point.
Real Estate Formula 2: Ensure you can get 1-1.5% of the purchase price in rent (or $300/mo in cash flow.)
One of the best benefits of real estate investing is the cash flow you can obtain. Research rent prices (and what drives them) in the area you want to invest in. If you want to make the wisest investment, the monthly rents shouldn’t be less than 1-1.5% of the purchase price. So, for a $200,000 house, you’d want to charge at least $2,000 in rent.
Go as high up in property value as you can. I would rather buy a higher-end property with a 1% gross return than I would a lower-end property with a 1.5% return. (Note: If you get a really great interest rate, you could go a little lower on the rent-to-purchase price ratio.)
Another way to look at this is to ensure you can get $300 per month in cash flow after principle, interest, taxes, and insurance are paid. This will provide you with money you can pocket as well as a reserve for maintenance on the property.
Real Estate Formula 3: Your purchase investment shouldn’t exceed 80% of the as-repaired value of the property.
After you’ve evaluated the median income and average rental rates in certain areas, you probably have a good idea of where you want to invest. Now the trick is to get your financing right! Your purchase investment needs to be no more than 80% of the as-repaired value of the property. So, if you purchase a property for $240,000, after renovations you would want the real appraised value to be at least $300,000. (However, in today’s low-interest environment, you could pay up to 90% and still have cash flow.)
Here’s a nugget: Don’t overanalyze your investments. You must know when to pull the trigger, and these real estate formulas will help you do that. If you can purchase and renovate a potential property for less than it’s worth and get a positive cash flow in an area you like, it’s a no brainer!