In recent years, rental properties have gained popularity, mainly because of the increasing inflation. According to Property Management, 35% of households live in rental properties, with almost half being under 35 years old. Nearly 51% of people living in New York live in rental properties. Hence, it is essential to learn how to evaluate and buy rental properties for those who wish to invest in rental properties.
How to Evaluate and Buy Rental Properties?
Recently, many investors have turned their sights on rental real estate. With such a large population living in rental units and paying an average of 35% of their monthly income on rent and income from real estate at an all-time high, this is an opportunity that investors can not miss.
However, it is not as easy as it looks. While rental properties are an opportunity, you must avail the right one. Hence, you must know how to evaluate and buy rental properties.
How to Evaluate Rental Properties
We have mentioned some of the best ways to evaluate rental properties below.
1. Gross Rent Multiplier
The gross rent multiplier (GRM) is a common evaluation approach for investors to evaluate a rental property. GRM consists of assessing recently sold properties in the neighborhood and their annual income to calculate an expected amount of rent you can expect to collect. GRM is then calculated using the formula:
Gross Rent Multiplier = Property Price / Gross Rental Income
A good GRM score ranges from four to seven, with the lower being, the better. If the GRM is low, your gross rental income is high, and you can sooner pay for the investment and look towards profits.
2. The One Percent Rule
The one percent rule is a method that experienced investors use most when they evaluate and buy rental properties. The method is simple and exact. Investors will rent the property at one percent of the price. For example, a property worth $500,000 should rent for $5000 monthly.
However, the one percent rule isn’t set in stone, and the rent can be higher. The rule is mainly used to evaluate a property. Investors opt out of the purchase if the property rent does not equal one percent of the total price.
3. Net Operating Income
The net operating income (NOI) is an evaluation method of rental properties that calculates the expected earnings. Investors calculate the NOI by subtracting the yearly expenses from the property’s annual income, excluding the initial investment.
To calculate the NOI, multiply the monthly income of the rental property by 12 to get an annual income and then subtract your yearly expense from the total value.
The NOI can help investors assess whether the rental property will generate enough income to cover the expense and give a reasonable profit.
4. Return on Investment
Another method that investors use to evaluate and buy rental properties is the return on investment (ROI) method. This approach is well suited for assessing different rental properties in the neighborhood.
To calculate the Roi, add the principal payment and cash flow together. Multiply this sum with twelve to get a yearly return. Then, divide the total by the total investment.
5. Capitalization Rate
The capitalization rate also called the cap rate or the net rental yield, is one of the best ways to evaluate and buy rental properties. The cap rate is used in addition to the net operating income.
To calculate the cap rate, subtract the annual expense from the yearly rent. This gives you an annual income without factoring in the property’s cost. Then, divide this yearly income by the total property cost and multiply by 100.
A good cap rate generally falls between eight to twelve percent. The cap rate is used with the NOI to calculate the market value. The formula for the market value is:
Market Value = Net Operating Income / Capitalization Rate
A greater cap rate means a low market value and hence, a greater risk.
Tips on How to Evaluate and Buy Rental Properties
Below are some tips you can use when you evaluate and buy rental properties.
1. Organize Your Finances
Before anything else, you must ensure you have arranged enough finances to cover the rental property. Below are something you must keep in mind when organizing your finances:
- A down payment between 20% to 50% of the property value.
- A good credit score of 720 or higher.
- Mortgage Payment
Your real estate agent at Robert DeFalco Realty can help you analyze how much finances you require for a rental property.
2. Evaluate Rental Properties
Before you invest in a rental property, you must properly evaluate the profitability and ROI. For such, you can use any of the methods mentioned above. Your real estate agent can also use different ways to assess rental properties and guide you accordingly.
3. Find a Rental Property
Before you can evaluate and buy rental properties, you must find them. Finding the right rental property can be complicated, depending on how much you know about rental real estate. You must consider different factors, including:
- The neighborhood
- Employment rate
- Population growth
- Type of rental property
- Property tax
You can find a rental property online on property listings before you go for a visit. Then, you must get a proper house inspection and evaluation before investing in the property.
4. Hire a Real Estate Agent
A real estate agent can help you with the entire process of renting a property. Real estate agents are professionals that have the necessary knowledge and skill to properly evaluate a rental property. They can help you organize your finances, calculate profitability, find a rental property, and more.
How Robert DeFalco Realty Can Help
Robert DeFalco Realty can help you evaluate and buy rental properties if you want to invest in New York. With over 35 years in the real estate industry, trained real estate agents, and an impressive sales record, Robert DeFalco Realty can help you invest in the right rental property.