With dozens of ways to invest your money, deciding to invest in real estate is both a little bit risky and very rewarding. However, to ensure that you actually a big return on your investment, you first need to do your research and determine whether a property is valuable enough to add to your assets. In order to do this, look at any potential rental property from the perspective of cash flow and immediate results.
Determine Potential Yield
Before you can begin to decide whether or not an available property is worth your time, you must first gather data about rental rates in the neighborhood and find out how much money you can expect to make each year. If you already have property management in San Diego, your team may be able to give you some insight into other comparable properties in the area. For instance, if similar properties nearby are renting for $1,200 per month, multiply that number by 12 months and your annual potential yield is $14,400.
Remember, there are always ways to increase the rent of your investment property if you want to make more money.
Next, you will need to look at your total annual operating expenses for this property. Some investors are able to put cash down and reduce their monthly payments. Other investors prefer using hard money loans to buy the property and are willing to accept slightly lower returns until it is paid off. Your expenses include not just PITI (principal, interest, homeowners’ insurance and property taxes), but maintenance, repairs, and HOA dues. Let's say that between PITI, maintenance and HOAs, you will pay out $4,500 a year.
Now that you have all of the numbers in front of you, it is time to start looking at what your actual returns will be. On the surface, we can simply look at the amount of positive cash flow you will be earning each month. In this case, $14,400 in annual rent minus $4,500 in expenses leaves you with $9,900 for the year, or $825 per month in positive cash flow. Any amount of cash flow above your expenses is a viable investment under the right conditions. It really just depends on your risk tolerance and how long you can wait for that number to increase.
In some cases, investing more money upfront to update the property can result in a higher monthly yield. We were able to increase a Del Mar property’s rent by 47% in just one month with some updates.
In the big picture, you may be wanting to know what all of this looks like in terms of percentages. This means taking your net profits ($9,900) divided by the total price of the house ($250,000), which in this case gives you a total yield of 3.96%. By contrast, the current 10-year bond rate is roughly 1.5%. In this comparison, the real estate investment clearly has a higher return.
However, it is easy to see how overpaying for a property or low rental rates in an area can drastically reduce your yield until it is nearly the same as a 10-year bond, which is a bad sign. With the help of property management company, you should have plenty of resources to make informed purchases and avoid taking any risks that won't pay off in the end.
You may have noticed that the majority of this valuation process deals solely with cash flow. You can't forget that property values also fluctuate, which will have a greater impact on your net worth, but will probably not be an indicator of whether the property does well as a rental unit at any given moment. There are many ways for you to make money on real estate, and enlisting the help of property management in San Diego is one way to manage your expenses and stay informed.