The question on every new investor’s mind is simple: how do you know if an investment property will be profitable? Lucily, there are two easy formulas you can use to determine if an investment property is a good buy, financially. We’ve laid them out below. Read them over and take them to heart so that you have them at your disposal when you’re ready to make a move.
The One-Percent Rule
When you start looking at investment properties, you’ll likely have plenty of options to choose from. Rather than being a complicated equation, the one-percent rule is simply a rule of thumb that investors use to help them narrow down their options quickly and efficiently. It’s a tool that you can use to determine if a property deserves a closer look.
All the one-percent rule says is that a property should rent for one-percent or more of its total upfront cost.
- A property that costs $100,000 should rent for at least $1,000 per month
- A property that costs $200,000 should rent for at least $2,000 per month
- A property that costs $300,000 should rent for at least $3,000 per month
Keep in mind that this rule looks at a property’s total upfront cost, meaning that you’ll have to add together the purchase price, plus closing costs, and an estimate of the total repair costs necessary to make it rentable.