percentage will very from location to location and house by house. Let's address one of the most common questions I get: How do I know what to offer for the property that I want to buy? One method people use to answer this question is the “One Percent Rule.” This means that the amount you’ll get in rent before expenses needs to be at least 1% of the purchase price. In other words, if you are offering $100,000 for the property, you can rent it out for at least $1,000 per month. This means you’d bring in 12% of the purchase price by the end of the year and equals about a 6-8% net profit after expenses. Keep in mind that the nicer the neighborhood is, the lower the profits tend to be. What you decide to offer for your property really needs to be determined by the type of return you will expect to get on your investment. If you are going to be purchasing the rental property using a traditional bank loan, you may want to back into your offer based off of the desired cash-on-cash return you are aiming to get.
MAKING THE NUMBERS WORK - RESIDENTIAL RENTALS
Cash-on-Cash Return This is a formula that I was taught when I began investing in rentals, and a formula that many of my buyers follow. For this example I am going to use our numbers from the example above on 123 Example Street, Little Rock, Arkansas. Here are the numbers you need to know for our example. In this scenario you, the buyer, would be getting a 30 year loan with a fixed interest rate and placing $25,000 down at closing. • Purchase price: $89,800 - $25,000 down payment = loan amount of $64,800 • Financed at a 3.75% interest rate over a 30 year loan.
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