An investor called me on a property yesterday, and wanted to know what I thought about a property he was interested in. Knowing nothing about the property, I could only offer general advice and questions to ask. Fact is, just because a property seems like a steal doesn’t mean it is.
Novice investors view properties kind of like they view homes–nice enough place, good location, looks good, and it’s priced at the low end of the range. But investment properties must be viewed through a different lens. Unlike a house, their purpose is to generate income, and, with luck, a capital gain down the road.
So, what to do if you’re a new investor and want to see if a place will cash flow? First, determine the rental income. If you don’t know, go to Zilpy.com. You’ll at least get a number to work with.
Second, take that number and multiply it by 80%. The number you come up with is what your monthly loan payment should approximate. Why take 20% off the rent number? Because that’s what repairs, maintenance, vacancy factors, etc., sort of work out to. Sometimes it’s less, sometimes more, but this works as a start.
With the monthly loan payment figured out, it’s easy to determine what loan amount the property will justify. For example, if rent is $1100 per month, 80% of that is $880 per month. At 6% interest, $880 will pay principal and interest on a %147,000 loan (rounded). On that property, you can justify paying the loan amount plus whatever you can afford to put down.
Prior to becoming licensed in 2006, I worked as an investor/developer for 35 years, and I’ve always used a similar exercise for a first-blush look. Of course, your due diligence will have to be more detailed, and investors need to understand the difference between cash flow and profit.
But it’s still a way to get to the gate.
