Determining How Much Profit Should You Make on a Rental Property Correctly
Investing in real estate turns out to involve a lot of things. The other side of coins that is often forgotten by beginners is the profit to take from the investment. The common idea of real estate investment is to buy cheap properties and sell them at a higher price. So, how much profit should you make on a rental property is another thing. It is a completely different thing from buying and selling.
1. Consider the Risks
There are always some risks involved when dealing with properties. Finding and purchasing the properties will bring some risks in many aspects. Altering the property a bit before opening it for rent may also come with some risks. The riskier the entire process in getting the property ready for rental means more profit to be taken from that particular type of property investment.
2. Calculate the Cash Flow
So, in terms of how much profit should you make on a rental property will greatly be affected by the so-called cash flow. This thing involves all projected incomes and expenses on the property that is for rent. Just calculate all of the incomes and expenses and the final result is the projected cash flow from the rental of the property. That can be the profit for the entire investment.
3. Define the Base Price
It is important to check the base price for a rental property around the area. This will help to get tenants faster while also ensuring that there will be a decent profit in the end. It is advisable to offer the base price for the property just the same as the base price of the local area. Offering it too high and tenants might be considering other options around.
4. Use the 1% Rule
This is the simplest way to determine how much profit should you make on a rental property. The idea of the 1% rule is to have a $200,000 worth house rented for $2,000 a month. That is the basic rule that a lot of people, especially beginners, incorporate. That will lead to a 12% revenue for a year. Eventually, the net profit will be about 6% to 8% of that.
5. Calculate the Cap Rate
This is similar to the 1% rule, but it is much more detailed. To calculate the so-called cap rate it involves the value of the property as well as the net operating income for a month. The house has a value of $200,000 with a net operating income of $1,000. It means that the cap rate is $12,000 divided by $200,000 that leads to 6%. The 6% will be the answer to the question of how much profit should you make on a rental property.
The idea to make a decent amount of profit on a rental property is not as simple as it seems. There are few things to consider and to calculate for the accurate and proper profit margin. In the end, investing in a rental property is not just about how much profit should you make on a rental property. It is wider than that in many ways.