What’s the Key to Identifying a Great Investment Property?

The key to identifying a great investment property is determining if the 1% rule applies to it.

How do you locate and identify a good investment property?

First, there are a few terms brokers use when it comes to real estate investment that you need to know about.

The first is cap rate (or capitalization rate). This is taking the net operating income the property is expected to generate over the property’s purchase price. Your net operating income is defined as your gross income minus the vacancy minus any type of fee you have to pay before the mortgage debt payment. The cap rate NOI is like a company’s EBITDA.

The second term is cash on cash. This is how much cash will be generated from your investment. This is the net of your income minus the debt payment (or principal interest that you pay the bank).

The last term is return on investment. Every year, you pay back 1.5% of your principal and add that onto your equity.

So, how do you identify a good investment property to purchase?

Let me give you an example. If a property is valued at $500,000 and is generating $5,000 in monthly income, then the 1% rule applies, and that makes that property a very good investment. With a 1% property, you’d have an 8% cap rate, a 12% cash flow, and 16% for your return on investment.

A $4,000 monthly income from that property would still be a great deal because you can still improve the property and raise the rent. At a 0.8% monthly rate, you’d still have a 6.2% cap rate, a 5% cash flow, and 8.9% for your return on investment.

Look for a property where the 1% rule applies.

Those numbers from each scenario are based on an interest rate of 5%, so they’re not unrealistic. The point is, you should look for a 1% property. Even if you find a 0.8% property, I can help you turn it into a 1% property.

If you want to know more about identifying a good investment property, don’t hesitate to reach out to me. I’d be happy to help you.