What I've learned about real estate investing
So this is where I became interested in the idea of investing. I got my first job and started contributing to my 401k like a "smart person". I also bought a house like a "smart person" and brought on some roommates. When I changed jobs and moved to a new state I didn't sell my first house.
I was a little worried, but it was easier to not sell it than it was to sell it. INERTIA. I believe that was one of the smartest choices I made. The only thing smarter would have been to buy a duplex and not sell it. I moved out of it 8 years ago and it has been occupied the whole time
I thought about buying another one mid 2022, but rates sky rocketed and it wasn't easy to justify buying a new one. So i started looking at some rules of thumb and it started to be clear.
If I wanted to get into this I needed to follow these guidelines. With interest rates being so high right now it didn't look good. the only way it would even be worth it was if I bought it well below market rate. I'm still keeping my options open in the coming years, and I'll be using these rules of thumb that I have found digging through the internet. Since this is buying property it has very high start up costs. $200k house requires $40k down.
Rules of Thumb:
- Try to buy a property at least at 20% below market prices. The old adage, “The money is made at the buy” is a smart general rule.
- What percentage of the property’s total potential gross income is being lost to vacancy?
- The typical lender is generally willing to finance between 80% of property’s purchase price or its appraised value. Conventional wisdom has always held that leverage is a good thing — that it is smart to use “Other People’s Money.”
- Debt coverage ratio DCR: It’s calculated as follows: DSCR= NOI/Annual Debt.. Most smart investors will look for a DCR of 1.3 or 1.4.
- Capitalization rate: Cap Rate =NOI / value; Rule of thumb is that I target 8-10% minimum cap rate. There is too much work involved if it is less than that. You need to be compensated properly for the additional risk and work involved.
- Cash Flow: Should be positive and $200-$300 per unit..at least
- Cash on Cash return: take the annual cash flow from the property and divide by the TOTAL cash invested. For example, if you receive $10,000 in cash flow and you invested $100,000 in cash, then your return would be $10,000/$100,000 = 10%
- 50% rule of expense: This rule of thumb states that for a real estate investment – the non-mortgage expenses will usually average out to about 50% of the rent.