Putting money in a rental property business is done with one major motive, to reap profit. Investing in real estate is comparable to investing money in any of its alternates like stocks or even precious metals in the sense that there will be risks and returns. The risks may be lower and the returns to break even will take a bit longer, but that is a trade off that you have already considered and prepared for. There are also a few more valuations that you will have to calculate before you enter into the business, or if you are considering purchasing more rental property units.
Cash cow or money pit?
If you plan on working by yourself and not through a third party agent, there are some basic valuation skills that you will have to develop that will help you make decisions on whether or not to buy, hold, or sell. It can be done simply on a spreadsheet, or if you are not comfortable with it, manually. Some experienced players in the field may feel that it is not really necessary to go through with these valuations if the property has been appraised and passed professionally. Appraisals of rental property may however show a different picture that a valuation does. To be on the safe side, perform a valuation as standard before you put your money on a rental property.
How to evaluate rental property
Before getting into an agreement, here are some of the first facts and numbers that you will have to calculate.
- Monthly mortgage payment vs. amount of rental income
- Price to rent, and price to income ratios
- Capitalization rate
- Cash flows
Once you have calculated these numbers, you can make a simple, informed decision about purchasing the rental property in question.