How to Find Investment Rental Properties: Evaluating Real Estate Property for Purchase

I love the idea of owning several real estate investment properties and living off of the cash flow from the rental income. I have two properties so far, but I’m still new to evaluation.

For a while, I loved the thought of owning a rental, but I wasn’t so sure I’d actually like the things that go along with owning investment properties (e.g. tenants, maintenance, etc.).

So before I pulled the trigger, I did some reading about starting up real estate investing, and I also had a discussion with a successful real estate investor. Here are some of the thoughts I have as a result of my research.

Shoot for 10% Return on Investment

If you’re going to take on the risk of owning property, you need to have a shot at getting a very nice return. After all, I know most of us aren’t lucky enough to have $1M sitting around in cash just waiting on the right investment property.

Most people getting into real estate usually have enough extra cash for one unit. Therefore, if you’re going to tie up a bunch of your cash in one place, you better be getting a solid return.

Enough of a return so that if something goes wrong, you can still get by with a lesser return.

In his latest book, The Skinny on Real Estate Investing, Jim Randel suggests only dealing with investment properties that can produce at least a 10 percent return on your investment.

As an example, let’s say you are looking at a piece of property that will provide $20,000 in rental income annually. Given that you have expenses (taxes, insurance, maintenance, misc.) of $5,000, you will have a net operating income (NOI) of $15,000.

Given this NOI, you should only expect to pay $150,000 cash for this property. Any more than that and you run the risk of problems with this property infringing on your ability to make a decent return (above 7%).

Of course, when you factor in financing on this property it changes the numbers in your favor (especially with today’s mortgage rates). Sometimes the leverage you get from borrowing is enough to dramatically increase your return.

But it also makes the entire transaction more complicated and stressful since you are now taking on debt, in my opinion.

I like the 10% approach. It seems conservative and it helps take the emotion out of the decision to buy.

If the numbers add up, then you are free to pull the trigger. If not, then it’s easy to walk away. I would bet that there aren’t a lot of 10% properties in my neighborhood. These types of properties are hard to find, I would imagine.

But that’s what makes them a good investment, right?

See if your next rental property makes sense by using Avail’s free rental property calculator tool.

Avail.co Rental Property Calculator

Calculate the Cap Rate, Cash-on-Cash Return, GRM, and IRR in 5 Minutes! Use to help you decide if a property you're considering buying makes sense!

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Look for Investment Properties Where You Can Add Value

A good real estate investor looks for ways to add value to a property so that the return on investment will go up.

When I spoke to the successful real estate investor, he shared with me how he was adding value to one of his current properties. He purchased a plot of land on the corner of a couple of main roads in his town.

The property was in a floodplain, so it was basically useless.

However, he told all the local construction companies that they could begin dumping their unwanted earth and concrete on the land. In a year’s time, this former flood zone had become a nice piece of property using this free material.

He is now contemplating placing a gas station on the land given its central location.

The jury is still out on whether he can make this work. But I was impressed at his ability to take something that most people saw as useless and turn it into something of value by using free resources.

The lesson to be learned here is to find properties where you can add value. Is there an extra space that could be rented out on the property? Are there small, low-cost improvements you could make to the property to increase the rent?

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Obviously, there is so much more to think about when it comes to investing in real estate properties (e.g. how to evaluate potential rents, how to collect rent, how to find good tenants, do you use a property management company, etc.).

But I liked these two takeaways because they force you to evaluate the property from a strategic perspective upfront. Like I said above, I’ve sinced learned that there are many other calcuations you can use to evaluate properties. The free tool from Avail.co is a great place to start.

What do you think? Would you ever like to own rental property? Do you currently own some? If so, what do you like about the process?

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Avatar About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.

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  1. Be careful and make sure that IF you use a realtor to find your investment property, that they know what they are doing.  I hired a realtor with 28 years experience of selling properties, who also owned 7 investment properties of her own.  I  purchased an investment property that she found, only to find out a week later that I could not rent it because the association was over their rental capacity with no end in sight.  The realtor said she called first and asked, and was told the town home could be rented by somebody over the phone, but she never got anything in writing.  Now I am sitting on a property, that I can not rent, and to make matters worse, the association lost their FHA status due to delinquent dues in 2011.
     

  2. i agree with your posting..but what sould we do first to find the 1st property investment?

  3. @Paul – what is the lease-purchase method?
    @Sandy – thanks for sharing that experience. sounds like it may just pay off big for you.

  4. Avatar Cheapskate Sandy says

    I have one investment property that I purchased in April and I used some money from my 401K (I know, I know) to purchase it all cash. Now, hear me out. I figured that I will repay my 401K in 3 years with 9% interest which is much better returns than it is earning now (a measly 2%). Now only that but the house was already rented to someone on a government program so her rent comes directly from the city and is always on time (actually a week early). So, I expect to recoup my initial investment not inclusive of taxes in 3.5 years and have no debt on the house. If property values rise again and I want to sell it in 5 years then I will make a profit since I purchased it from an extremely motivated seller.

    I’d love to purchase another one since I see an AWESOME deal, but alas, I don’t have the cash and I would NEVER take out a mortgage for an amount that was less than the amount that I used to pay for my car. 🙂