Article summary
So you heard that rents went up by 12-14% last year, and now you want in on the long-term rental (LTR) racket, maybe because making money by NOT working hard sounds good for a change. But how do you know if you should jump in, and how do you choose the best property? Glad you asked.
Run The Numbers
The most important thing to remember when searching for a rental investment is that you should never purchase something you can't afford. Since affordability is all about knowing your numbers, let's break down the numbers you'll need to consider as you evaluate potential properties.
Remember the 1% Rule
The 1% rule of rental properties compares the price of the investment property with the income it will generate. To indicate a property is a good investment, its monthly rent should be at least 1% of the asking price.
Know Average Rents
Get to know the average rents for your target area. Understanding how much rent can be expected from various sizes of property in your area of interest is key to knowing how much income you can anticipate. Check out Zumper’s to get started. Remember, income potential helps you determine how much mortgage payment you can afford.
Know the DSCR
Once you know the potential rent, you need to know how much income you can use from the rental property itself for the purpose of getting a home loan. The ratio of rental income that may be used when qualifying for a loan is known as the Debt Service Coverage Ratio (DSCR), and some lenders will let you get a loan based solely on the income from the rental property itself. This can be as high as 80% of the rent, which means that you must have a down payment of at least 20% if you plan to pay the mortgage solely with the property’s rental income.
What About Location, Location, Location?
Location is important, because some locations perform better than others. However, if the numbers aren't right, even a home in the nicest location may be a terrible investment idea for you. Don’t be convinced you need to scoop up that property in the great school district if it’s outside of what you know you can afford.
Putting It All Together
Nothing is guaranteed, but understanding the relationship between these numbers will help you make an informed decision.
Potential Monthly Rent(s) x DSCR .80 = Income that may be used for a loan qualification.
1% Rule. If the Purchase Price ÷ the Rent Amount = .01 or greater, the property meets the 1% rule and has good income potential.
Still need more analysis? Calculator.net has a helpful tool for calculating costs and profits associated with your potential rental property.
You can never be certain how your rental property will perform in today's housing market. To guarantee that you gain from rising or falling rental property values, consider a Home Price Protection plan from REZITRADE. It protects you from negative swings in the market by ensuring your principle is never affected. No matter when you purchase your first rental property, use these tips to get the best possible value for your dollar…and many dollars to come!
Takeaways
To determine the best rental property, you should-
- Run the Numbers. ALL the Numbers.
- Know average rents for your target area.
- Know what percent of rental income can be used for mortgage payments.
- Understand the 1% rule.
- Protect your investment from drops in property value
