This blog’s content comes from Karen Conrad and corresponds to episode 55 of The WealthBuilders Podcast.
Being a profitable investor is not hard if you follow the right real estate formulas. When we were beginner real estate investors, we made the mistake of only looking for properties where we lived in South Lake Texas. (For reference, their market is crazy right now—people regularly place bids $40,000 over asking price and still don’t get the property!) We didn’t think that we could manage investment properties that weren’t close to us, nor did we want the inconvenience.
After enough failed attempts, my son Levi researched other areas using the real estate formulas provided by Billy and Becky Epperhart. He found a hot market about two hours from where we lived. We took the leap, and soon realized that the inconvenience of living in a different city than our investment properties could be mitigated by having a strong team (property managers, maintenance crew, etc.)
[Related: 8 People You Need on Your Real Estate Team]
In this blog, you will learn how to use four real estate formulas to find profitable investment properties. These formulas will help you discern which markets have renters that can afford (and will pay to live in) your property. In addition, you will learn how to find investment properties through online research. This way, you don’t have to travel several hours to investigate a market!
4 Real Estate Formulas
1. Be Able to Charge 1-1.5% of the Property Asking Price in Rent.
For example, on a $150,000 home you would need to be able to charge $1,500 per month in rent.
2. In Tighter Markets, Be Able to Cash Flow at Least $300 a Month in Rent.
For example, if you buy a $400,000 condo in Denver and your mortgage (PITI) is $2,200/month, you will need to be able to charge at least $2,500 in rent to be able to follow this guideline.
3. Don’t Pay More Than 3-4 Times the Median Household Income in an Area for a Home.
Finding the median household income of a city or town is as simple as a quick Google search! This real estate formula helps to ensure that people in that rental market can afford your property with their current standard of living.
4. Make at Least a 10-20% Cash-on-Cash Return Annually
- For example, if you put a $30,000 down payment on a property, you would want $3,000-$6,000 net return annually (or $250-$500 a month.)
- Include your down payment plus any renovations you had to make on the property into this amount. This formula will help you accrue enough income to purchase more rental properties.
How to Find Investment Properties through Online Research
Now that you are familiar with the former real estate formulas, it would be helpful to know how to find the variables! Knowing how to find investment properties is simple with online tools like Realtor.com and Zillow. Follow these tips and you’ll be on your way to finding profitable investments!
1. Determine Where You’re Willing to Invest
Before I start researching, I like to determine where I’m willing to invest. You’ll want to determine beforehand how far you’re willing to venture from your primary residence to purchase a property. A good way to assess ‘hot markets’ is to Google rental demand in that area and look for up-and-coming business growth. Consider which factors might draw new tenants to that area.
2. Study the Market
This is where Realtor.com and Zillow come into the mix! Enter one of your preferred rental locations into the website’s browser. It will show you every property for sale in the area. I like to check the box that says, ‘Hide Pending Properties.’ This gives you an idea of the true inventory of a market, and you can begin to assess how quickly properties are selling. From there, you can find information such as the price per square foot and the average prices for homes.
After an initial review, I like to compare the current market to homes that have recently sold in that area. This is important because you want your properties to appraise (increase in value!)
3. Figure Out Rental Demand
Once again, I cannot stress enough the importance of understanding how much a property will rent for before you purchase it. Remember, it needs to fit within the 1-1.5% or $300 cash flow rule! Both Zillow and Realtor.com allow you to view the houses for rent in an area as well. They allow you to see how much properties are renting for on average, and you get a glimpse of the competition. As an investor, the fewer houses for rent, the better.
These formulas seem more applicable to single family homes. I work overseas, and I’ve had single family homes in the past and then moved to a small multi-family unit. Having gone through the down turn in 2008 having a multi-family unit was a lot less riskier than single family. And as I see it we’re heading into even a greater down turn than what occurred in 2008. What criteria would you use for multi-family apartments (8 plus door units)?
Thank you for your comment! The formulas are still good guides in many ways, and we help clients analyze multi-family CAP rates which is an important metric; specifically the cash flow “per door” required may be reduced compared to the single family unit depending on the strength of the deal.