Hey BP family,
Just a few questions I'm running into in my over priced south Florida market.
What determines if a property is actually a good investment? 1-2% rule, Cap, etc?
What if it doesn't make the 1-2% rule but has a good ROI or Cap, etc?
That's going to be a really hard question to answer, I'm afraid. There are so many variables, not the least of which is where you are in your investing career and what's going on in the rest of your financial life. And your personality and level of risk acceptance.
For instance, if you're just starting out, some would say keep it super safe, go for a conservative return on a property that needs next to nothing and has looks to be very low maintenance going forward. Others would lean towards a property that needs tons of work that you could get for way under market, figuring that if you don't make high returns at the start you'll never have enough profit and momentum to build your business.
Both of those could be considered "good investments" for different people at different times.
I know that reading about other people's deals and business approaches here on BP helped me open my mind to some different possibilities and helped me develop a set of standards that work for me (for now). It also convinced me to take my investing out of my local market. Others here swear that there are deals in every market, you just need the skills to find them. I am hoping that both approaches are correct! Ask me in a few years...
A good investment is one that makes the return you want with the risk you want or one that makes the average return for the area. For Instance if you buy a property with a 10 Cap and all others in the area are producing a 12 cap, some would say it is not a good investment but you may be satisfied with a 10 cap and call it a good investment.
Your return is dependent upon the rent, the expenses, appreciation and the leverage. If rent is low (under 1%) then expenses have to be low to produce a good cap rate. My experience is that expenses are somewhere between 40% and 60%. A cap rate has to be higher than your cost of money. I like 3 percentage points higher.
Of course you can see that if you expect 10% appreciation, then you might be willing to only breakeven on cash flow.
Only you can decide what you are willing to do.
Thank you @Jean Bolger and @Bill Jacobsen Makes sense!
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing