How Much Should You Pay for a Rental Property?

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How Much Should You Pay for a Rental Property?

Finding a property for sale that is already taking in rent can be a nice investment. Already having a tenant (or multiple tenants) in place, can save you How Much Should You Pay for a Rental Propertya great deal of time and money, and it can provide you with immediate cash flow. But, before making an offer on the rental property, you need to ensure that the numbers work out in your favor.

One way to do this is to use the capitalization, or cap, rate. When doing so, you will use the ratio of the net rental income in relation to the purchase price of the property. Here, you start by taking your gross rental income amount – which is the total of one year’s worth of rent.

If the property is a multi-unit building, then you will simply take the amount of rent that is collected for all of the units combined. You then subtract a small percentage – such as 5% – in order to account for potential vacancy during the year.

Once you have done this, add up all of the annual expenses for the property. This should not only include the utilities and maintenance, but also property taxes and insurance. Then, subtract this total from the amount of your annual income figure. In order to then get your cap rate, divide that net operating figure by the purchase rate.

Using an actual example, if you are considering a 5-unit multi-family property that pulls in $100,000 in gross annual income, and that also has $30,000 in annual expenses, then you would have a net operating income of $70,000. If the purchase price of that property was $1 million, then the cap rate on it would be 7%.

Once you have come up with the cap rate, you will then need to determine whether or not the investment is going to provide a worthwhile return, based on the work that being a landlord requires, as well as on the quality of the building, and its potential resale value in the future.

For example, if the property needs some major renovation, then you may not want to take the risk on it, as this will cost you additional money out-of-pocket. If, however, the property is fully rented and it is in a prime location, it could be something to consider.

If you don’t want to spend the time that it takes to manage an investment property – yet you still want to reap the income benefits – you can always consider working with a professional property manager. Doing so can free up a great deal of your time, yet still provide you with the incoming cash flow from your property. For more information on the benefits of working with a property manager, Contact Us.

2016-10-26T21:12:42+00:00 By |Investing, Investor Mentality, Making Money|

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