Here’s why becoming a real estate investor may be one of the most financially prudent things you can ever do.
I’ve seen people fund their children’s college education or retirement from the corporate world through real estate investment.
To be a successful investor, you have to ask yourself what your goal is; what are you trying to get out of it?
The 1% of rents rule is generally how I evaluate potential investments. This rule of thumb states that the monthly rent should be equal to or greater than 1% of the total purchase price of an investment property. For example, if a property would list for $200,000, and it’s currently generating $2,000, that would be pretty close to a 10% return.
The capitalization rate (aka the cap rate) is the net income of an investment property divided by the purchase price—this tells you your return on the property. In addition to that, you have your cash-on-cash rate, which basically answers this question: If you’re putting a down payment on a mortgage, what is your return that year, cash on cash?
Quite often, your cash-on-cash rate will be higher than your cap rate because you’re using leverage in terms of debt (i.e., you’re leveraging your down payment with debt to be able to buy something that you normally couldn’t).
One of the reasons real estate is the best investment has to do with the property tax deductions you can get on interest. If you’re an LLC or corporate structure, your taxes are going to be a fixed rate, not to exceed 18% to 20%. Ultimately, you should discuss how investment properties impact your taxes with your accountant.
The Des Moines metro is attracting a lot of outside investment, which is pushing some of our cap rates down. The average cap rate in a tier-one city like New York or Los Angeles is typically around 4% to 6%. In our marketplace, we’re looking at a minimum of 6% to 8%—sometimes even 10%.
Back when the mortgage market crashed and the housing market was much slower, it was much easier to get a 10% to 12% return on your investment. That being said, there are still plenty of great buys out there today. Please contact me and my team at EXIT Realty Capital City to talk about where those investments are. We’re always happy to be of service!