The Buying Criteria for a Rental Property
What should you really be looking out for in a rental property? Are there factors you should be considering? Are there guidelines you should be following? Also, what about all those classic ‘playground rules’ that so many people chatter on about? Well, that big picture, straightforward advice, I am about to give you. It will really help you get more insight into what you should be bearing in mind, when in search for your next rental property.
Ultimately, the main point when it comes to any kind of real estate investment is the numbers, the potential revenue it will bring and whether it is financially worth it. So if the numbers aren’t working for you, then why are you even considering it still?
Cash Flow and Numbers
There is absolutely no way you should be investing in a piece of property without fully understanding all the numbers that are involved. Regardless of whether you are going for a rental property where you will be relying on the cash flow from it or if you are simply buying it for appreciation, you are investing money into the property and therefore, the numbers matter.
The simplest and most accurate equation to help determine the return on your money is the cash-on-cash return. However, in addition to this, you will also need to wrap your head around cap rate because that number is used a lot and will thus, give you a better idea of the worth of the investment. Then, the even broader question to ask is what is the cash-on-cash return and the cap rate is the will the investment provide a positive or a negative monthly flow? Those equations will help you figure that out, and whatever the final number you get is, you will get your answer. BUT once you run those numbers, is that all you have to do?
Cash Flow Sustainability
It is easy to come up with predictions on how they believe their finances will go, however, those predictions are after all just predictions with no guarantee that they will actually work out. So the next question is this – how likely is it that your cash flow will continue at the level that you predict and will you be able to predict your cash flow?
In order to ensure that your cash flow projections are indeed sustainable, it is important to invest in a solid growth market on both a micro and macro level. For a quick clarification: the macro refers to the larger city that it is close to i.e. Los Angeles, New York, Chicago etc. All of the larger metropolitan cities in their area will constitute the macro market. Meanwhile, on a micro level, this refers to the smaller city outside of that larger metro city that you are buying in – and sometimes it can even refer to the neighbourhood in which you are investing in.
The whole point on knowing the trends of the macro and micro market is simply because If you invest in a declining market, the chances that your rental property may not continue with its predicted cash flow increases.