Many people invest in real estate with no clue if the market they are buying in is a good market to buy in. Granted, an experienced investor can make money in almost any market. However investing in markets with odds in your favor is always a much better option to take.
These are usually flights that are flying from “hub” to “hub”. That means the airline has a base of operations there and because of that there are more frequent fliers flying out of the hubs than other cities that the airline may service.
The same concept is true in determining good investment markets to buy real estate. If there are more buyers and investors than there are properties for sale it is difficult to get an “upgrade” so to speak. So here are the guidelines that we have given you thus far in previous blogs:
• The gross monthly rent should be 1%-1.5% of the purchase price plus repairs. This is the price/earnings ratio like a stock. This amount can be adjusted downward when interest rates are lower such as now.
• The median price of a house should never be more than 3 to 4 times the median income. If it is, the market is overpriced.
The two new strategies in this blog are:
• Inventory of houses should be around a 6 month supply. For example a market with only a 3 monthly supply is too hot and you will over pay. I like markets with a higher supply say 9 months but you must be typically willing to hold properties like this for a longer time until the market bounces back.
TIP: Ask your realtor to give you the inventory of the city or area that you are considering for the last five years for July 1 of each year so you can determine supply and how the market is trending.
• A single-family house should have positive cash flow of $250 to $300 per month after Principal, Interest, Taxes, and Insurance. When possible add in Management fees and try to keep the PCF at $250.
We will be publishing a new blog post every Sunday, Monday, Tuesday, and Wednesday every week. Join us tomorrow to talk more about money matters!
Great stuff. I love the specific info. How does the pcf apply to a small house that only rents for say 400 per month.