A Rental Property may be a good investment, but with the costs of loan payments, closing fees, maintenance, insurance, and taxes it can end up being a costly exercise. As an investor, before committing into buying a rental property, finding out the basics of calculating its worth can in the long run save you from making an investment where there is no good return.
Find out the different options you can try out in order to find out the worth of an investment property before placing money into it:
In order to know whether you’re getting a good return on your property, a capitalization rate can be a good determinant. The CAP rate, can be determined by dividing the net income of the property by its overall price. The higher the capitalization rate, the better the annual return for your rental property. This, however differs from one state to another, and depending on your investment goals. You can have a cap rate set so as to know outrightly whether to buy a rental property or not once you do your calculations.
If the gross monthly rent is at least one percent of the purchase price, then returns may not be as good. The net revenue, for an annual calculation after all the expenses should be around 7 or 8 percent for the rental property investment to make sense. Although some investors would only agree to buy a property if the monthly returns account to 2 percent or more of the purchase price, inclusive of repairs. The one percent rule can work as a determinant to whether a rental property should be invested in or not.
In comparison to other properties in your location of interest, it is advisable to divide the value of the property by the gross rent. The lower the gross rent multiplier, the better the investment. If other properties are getting higher rental rates, then the property you have in mind may not be such a good investment after all. It is also possible to determine a property’s rental capability by the location, financing and condition of property in order to decide its value in terms of returns.
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