Five rules for evaluating rental properties: buy at the right price, expect expenses to eat 55% of rent, understand capitalization rate, put down enough money, and keep transaction costs low.
I just wanted to give you a few kind of basics for evaluating a rental property investment. The first rule to keep in mind is that you really make your money when you buy. If you overpay for something, you're just not going to have a very good return. The second rule is what I call the 55% rule. The expenses of owning are 45%. There are things like vacancies, insurance maintenance, property taxes, snow removal, lawn maintenance, repairs, and management costs. You only get 55% of the rent to cover the mortgage and your profit. The third rule is to use the capitalization rate to compare one property to another. All right, rule number four. You got to put down a significant down payment if you want positive cash flow. And then the last rule is to minimize your transaction costs. Transaction costs are probably 15% round trip, 5% to get in, 10% to get out. So $200,000 property, that's going to cost you $30,000 round trip. So you want to minimize those as much as you can.
Physician Takes a Youth Sports Team to the State Championship - MtoM Podcast #236
