How to evaluate a rental property

Question

How do you determine if a rental property is worth purchasing or not?

I understand that the 50% rule is a guideline for analyzing rental properties but what if the properties expenses are taking 80%-90% of the annual income? is that normal?

for example if a property's annual income is $45,000

and the annual expenses are $39,600,

thats nearly 90% of the income going towards expenses.

would this be a potential investment?

i need hlep...thank you in advance

Jeff J. · Answer

Also, if they are reporting capital upgrades as operating, that could be jacking the NOI.

Sharon Tzib · Answer

Yeah, knowing what kind of building this is would be helpful. If this is in Sac, then at $45K annual income, I'd assume a 4 plex perhaps?

However, NOI does not include debt service, so if he gave you the expense number with that included, you need to back that out to get a true representation of cash flow.

Before you go any further, you really need to look at his operating statements and figure out what's going on. Maybe he pays all the utilities or something? That can be a killer sometimes. Let us know what you find out.

Shuai Zeng · Answer

The way hes describing it could be hes taking out full loan, with monthly payment of 2.5k - 3k, than there is maintenance with around 100, tax and land etc. Good rule of thumb is always 2% of the purchase price on rental or more. If your only taking 10% as profit, are you going to hold till 30yrs?

I'm just assuming here since no other info were given.

Dawn Anastasi · Answer

@Raymond Ali

I can't imagine a scenario where 90% of your income are expenses is a GOOD thing.  Everything is a potential investment, whether its a GOOD investment is the better question.

How could you possibly have that much in expenses on a property?