Locating a Great Investment Property

When looking for your next investment property, how do you know you’re going to turn a profit? The best way to determine that is by using the 1% Rule.

When looking for a great rental property that you can purchase as an investment, there’s a tried and true trick to ensuring that you’ll get great returns. Before I dive into that, I wanted to help you get familiar with a few terms that we used in the investment world:

Capitalization Rate: The rate of return on a real estate investment property based on the income that the property is expected to generate, and is determined by taking the Net Operating Income / Current Market Value.

Cash Flow: Also called cash-on-cash, your cash flow is usually the proceeds from rent payments after you’ve subtracted any monthly expenses. This cash flow is the return on the money you put in as down payment.

Return On Investment: Every year you pay back 1.5% of your principal balance and add onto your equity.

A good way to identify a great investment property is to look at the value of the property and use the 1% Rule.

A good way to identify a great investment property is to look at the value of the property and use the 1% Rule. For example, if a $500,000 property is generating $5,000 monthly in profit, or 1% of the total value price of the property, then it is considered a great investment property. 

If you find a “One Percenter,” you have an 8% capitalization rate, 12% cash flow, and 16% return on investment. These values go up if the original percentage is higher. However, in California, these types of properties are hard to find. In this current market, finding a property that is priced the same at $500,000 but is taking in $4,000 in monthly profit is still a great investment.

The reason for this is because many areas in California are not rent-controlled. This includes Los Angeles and parts of Southern California. When you invest in a property that doesn’t meet the original 1% Rule, all you need to do is improve the property and you’ll be able to raise the rent. Even so, without the improvements, a property like the one I described above is still seeing a 6.2% capitalization rate, 5% cash flow, and 8.9% return on investment. Those are great numbers.

So the only thing you need to do next is to start looking for those One Percenter investment properties. Even if you can’t find them and you land on a “Point-Eight Percenter,” I can help you restructure your investment to meet your 1% goal.

If you have any other questions about this or any other topic, please don’t hesitate to reach out to me. I look forward to speaking with you soon.