Getting started with Real Estate Investing in USA

Buy Box

The first thing that you want to start with is deciding your buy box. This is a fancy term which simply means a set of conditions or filter criteria which you will use to shortlist the properties for investing.

Typically your buy box should include type of property, neighborhood and property class, number of bedrooms and bathrooms, schools ratings, price range, COCR, monthly rent etc.

Monthly expenses on rental property

Source

1. Property management

If you are hiring a property management company to manage your property in terms of finding and dealing with the tenants, then you would pay approx 8%-10% to the property management company.

2. Repairs and maintenance

Every property will have some ongoing maintenance. The gutters might need fixing, the water heater might break etc etc. You should ideally set aside some money for these expenses.

3. Utilities

Depending on how you draw your lease terms, you might end up paying for utilities.

4. Property taxes

These are yearly property taxes that you will need to pay. Its good idea to factor this in your monthly expense.

5. Home insurance

6. Mortgage payment

If you take a loan to buy a home, you will have a monthly mortgage payment that you need to pay. Factor this in your monthly expense.

7. Vacancy

There are times when you rental property might not have a tenant but all the above expenses will still continue. And thats why you should save up for tackling this scenario every month.

Analyzing a real estate property

Back of the envelope analysis

This method is shared by Coach Carson on his channel here.

The job of a rental property is to help you steady build cash flow and long term equity. Always remember this goal. With this in mind following are few formulas that you should keep in mind when analyzing a rental property from income perspective.

Analyzing income potential

1. Gross Rent Multiplier

GRM = Total price / Total annual rent

e.g if house price is 250,000 and the rent will be 2500 / month, then

GRM = 250,000 / ( 12 * 2500 ) = 8.3333333

Now this formula is generally used to compare two rental properties either in same market or different markets. The lower the value of GRM the better.

2. 1% rule

This is a rule of thumb in real estate. Note that this rule alone should not be used for making the purchase decision.

The 1% rule says that the monthly gross rent from a property should be greater than or equal to 1% of the total purchase price of the property. So e.g if you are evaluating a property listed at 200,000, if the rent on that property is going to be more than 2000 then its a good potential rental property.

3. Cap rate

Cap rate = Net operating income (annual) / Total purchase price

NOI = Gross Annual income - Annual operating expenses

Cap rate basically helps us to measure the ability of the property to produce income. The more the cap rate the better.

4. Net Income After Financing

NIAF = NOI - Financing Costs

5. Cash on Cash Return

COCR = NIAF / ( Down payment + get ready cost / repairs + closing costs etc )

This formula will help you to analyze the returns that you are getting on property.

Analyzing equity potential

There are four ways the equity on the property can grow.

1. Buy at discount

This is a all about buying the property below what its actually worth. You need to understand how much the property is actually worth. This you can do by pulling comps for similar homes in the area. Few scenarios which you can leverage to get discounts is a foreclosure, a couple going through divorce etc.

2. Add value by doing fixes and renovations

3. Pay down mortgage

4. Passive price appreciation

Buying in a right location and just holding is a great way to build equity through passive appreciation.