One of Jason’s favorite concepts regarding the search for suitable investment property is does it make sense the day you buy it? What exactly does he mean by this? It all relates to the idea of sustainable investing. By sustainable we mean that the metrics of the deal will insure the property can sustain itself through rental income cash flow and you won’t be forced to sell it at the wrong time.
The main reason people get themselves into trouble with real estate investing is they bought on speculation a property that never made financial sense and was a ticking time bomb waiting to go off from day one.
Why would you speculate when it’s so easy to determine if a particular property makes sense or not. The number one metric to look at is the Rent-To-Value (RV) ratio. In other words, compare the value of the property to the monthly rental income potential. The ideal RV ratio is .7 %. 5% is acceptable but 7% is better. It only takes simple math to figure out that the $200,000 property you’re pining for needs to generate $1,400 per month in rent to keep you out of trouble. If it doesn’t, don’t waste another moment thinking about buying it.
There’s plenty of property out there. Find another one.
If you knew nothing else about income property investing except how to use the RV ratio properly, you’d be head and shoulders above the majority of investors who take a blind swing at real estate.
The Platinum Team
Flickr / CJ Sorg
