Should I Purchase an Investment Property?
By Chris Petry
Let’s get the big question out of the way first: just what is an investment property? Simply put, investment properties are properties purchased or otherwise acquired with the sole intention of generating income. That could mean they intend to flip it, rent it out, or repurpose it for business purposes. Despite the fact that, here we go again, interest rates are a little higher than they were a few years ago, an investment property can still be a lucrative venture. It’s not for the faint of heart. Up front, it can be a great expense to the individual investor. You need to make sure that whatever you spend to purchase and renovate a home for resale, can be recouped. Better yet, you want to generate new income. After all, why take the risk of a mortgage or a loss of savings if you’re not going to see a return on that investment?
This recent article from RocketMortgage.com, suggests a concept called the 1% rule. They lay out an example of a home investor who purchases a property for $300,000. At that price, the investor would need to set rent at around $3,000 per month to meet the standard investment goal of a 1% return. That number, of course, assumes the seller rents the property without further investment. If they need to make repairs, the cost of said repairs should be added to the base number before dividing. For example: the purchase price is $250,000. You do $20,000 in renovations. Your investment is now at $270,000. To meet the 1% investment goal, divide the 1% from the $270,000. Rent would then be set at $2,700.
For flippers, Bankrate.com breaks down a concept called the 70% rule. Here they suggest that the purchase price of your investment property should not exceed 70% of the ARV, or after-repair value of the home. Here’s an example: you find a property you’re interested in buying. You speak to an agent from Berkshire Hathaway HomeServices Stouffer Realty who does a comparative market analysis and determines that similar homes are selling for around $200,000. Now, 70% of $200,000 is $140,000. So, you should pay no more than $140,000 on the property to return a profit. Suppose this home, like the one we talked about above, needs $20,000 in repairs before it goes on the market. You need to subtract that from the $140,000 as well. So now, you should make an offer for no more than $120,000.
Investment properties can be highly beneficial to your financial well-being by diversifying your investment portfolio and providing supplemental income for retirement and savings accounts, college tuition, travel, hobbies and more. Just don’t rush in to it without a proper plan in place. Reference the above rules to make sure you’re not only receiving a return but a surplus on your investment. Of course, all situations are different and figures may vary based on your marketplace, as well as nation and local real estate trends. A sit down with a professional REALTOR, loan representative, or financial counselor may be beneficial to better understand the ins and outs of real property investment.
