Rental properties are very lucrative ventures that anyone can do and there are various tactics to measure its progress and success. Of course, the cash inflows and outflows are critical factors in this type of investment. Thus, evaluating it before engaging into a deal will be a great start. When you own a rental property, it is very expensive to handle. You should manage all the costs like maintenance, insurance, taxes, loans and so on. Thus, there are proven rules to ensure that you have chosen the best type of investment. When making business decisions, the potential profit can be visualized through the 1% rule and the 5% rule.
How does it work? Let’s discuss how you can use them in your investment.
The 1% Rule
This rule pertains to the price or cost you charge in renting out your properties to tenants. This is the price you collect from them as a rental payment. The goal is to rent out the property with 1% or more from the entire price of the asset. For instance, property managers in Alabama have a property worth $80,000. In order to implement the 1% rule, a tenant must pay a rental price of $800 or more. Otherwise, it will not be an ideal type of investment.
However, you should not buy properties and just conduct the 1% rule on a leasing agreement. It will not surely encourage tenants. The price will still depend on the current trends in the market. The price should be reasonable and competitive like how much other property costs.
Key Benefits of 1% Rule
Most professionals utilize 1% Rule as a medium to identify if the investment will be lucrative. Given the example of a property worth $80,000 – if there are numerous homes in the surrounding area with a $600 rental fee this will not be fair. It is not considered a great investment since it is far from what’s 1% rule requires.
As you can observe, it is quite difficult to achieve the 1% rule in some places including in some markets. Thus, considering the external factors such as the competition, market circumstances and rental opportunities would be beneficial. Through careful implementation of the 1% rule while benchmarking from what other properties have, you will be able to determine what’s feasible.
The 5% Rule
The real estate 5% rule is pertaining to spending. The 5% from your rental income should be dedicated to repair and maintenance costs. This is to ensure that the asset will remain in good condition that may appreciate overtime. Yet, the 5% cost is not a fixed value. For sure you will encounter lots of unexpected repairs and maintenance requirements that would be more expensive than 5%. And there are some cases lower than that. But the main target spending cost is just 5% from the overall profit.
For example, a home buyer in Chattanooga owns a property that has a rental cost of $1,800. The $90 of that must go to its regular maintenance costs leaving the owner the $1,710 as his profit and payment for loans. The cost must always be realistic. On the other hand, if you have a loan worth more than $1,800 or the value of the rental fee, this deal is not good. There should be a budget for usual expenses and of course, a reasonable income.
Target the rules but don’t force it
If you want to become the best real estate investor, you should aim to obtain the 1% and 5% rules without forcing it. Always remember that it has to be realistic and achievable. Consider the various variables and factors in evaluating whether the property will be profitable or not. As long as you exert an effort aiming these rules, you will come up with better investment decisions. The cash inflows and outflows in your portfolios must be efficiently managed.
You may also like:
Home Seller’s Frequently Ask Questions
What to Eat at Red Lobster| Sea Food Restaurant
