Having a gut feeling about an investment property is not a reason to make a purchase. You might think that the location can’t be beaten and that the property looks very appealing. But without running some numbers, you have no way of knowing that you are making a solid purchase that will help you to grow your real estate investment business and your personal wealth.
There are many evaluation processes that will take you through gathering almost a dozen numbers and making a lot of complicated calculations which can do the job. But There is a much easier method that can answer the question with just two numbers and one simple math problem. The method is known as the 1% Rule. In short, the rental income for a property should be 1% of the purchase price. This is on a monthly basis and it will tell you if the purchase is going to be profitable.
For a one hundred thousand dollar purchase, the property should be renting for a grand a month. This should cover all of the property expenses. If you want to add in a greater safety net, subtract 40% of your annual rental income to compensate for vacancies, repairs and other unexpected costs. This buffer might seem to be very large, but it is designed to protect you even when something big goes wrong like a furnace or air conditioner that needs to be replaced.
The reason that you want to be cautious is not to limit your purchases but to protect yourself from getting into a situation where your rental properties are not making you any money, and they are actually costing you money. This is a quick way to end a real estate investment career and to create a huge setback in reaching your personal financial goals. Never make an investment based on emotion or a gut feeling. Always run a few numbers to be sure that you are making a smart purchase and that it will provide you with a solid return on your investment. This is the only way that real estate investing will lead you to financial freedom.