What key numbers should a rental property investor look at in terms of possibility of positive cash flow?

In one place a $90,000 property may generate $1,300 rental income monthly; while another place the property may cost twice as much to generate the same amount of income. Are there key numbers to look at to help with making a quick decision? Which real estate investment books or resources would you recommend?

The first place I look at is the Gross Rent Multiplier (GRM). The formula is GRM = Sales Price divided by Annual Rent Collected. The number should be around 6-9, usually. If the number is above 13 or so, then you most likely have negative cashflow. So, the lower that number...the better. In your case, $90,000/15,600 = 5.7 which is good.

The next thing I look at is Cap Rate. Every investment property at the end of the year puts extra money in your pocket...which is called the The Return on your Investment (ROI). The rate ("speed") at which that occurs is the Cap Rate. The formula is... Cap Rate = Net Operating Income divided by Sales Price. So, if you have two of the 3 then you can figure out the 3rd variable. Usually, a good cap rate is 6%-10%. Ask the Realtor what is the average Cap rate in that market...and they will give you a percentage (so that's 1 of 3 variables). Now you look at the sales price of the property, say $350,000. Then you can estimate how much NOI that property produces. OR you can figure out the NOI from due dilligence work...and you still have the cap rate of 9%...and solve for the Sales Price....is it close to what the seller is asking for??

I definitely have read MANY books on investing and real estate finance. I can HIGHLY recommend you get "38 Formula's Every Real Estate Investor Should Know" (looks something like that with a blue cover) and also highly recommend "The Real Estate Entreprenuer". But I would NOT recommend anything from Trump...people think just because he is the biggest developer in NYC he can teach you how to invest...BS....stick to the basics. Good Luck

Your statement can absolutely be the case. In fact you can often get a higher percentage return on lower value homes. The best way to do this is to find one that is in terrible, but repairable shape. For example, if the houses in the neighborhood appraise for $60k-$80k, you might find a "dog" for $25k, put $20k into it and have a house that appraises for $70k for only $45k.

If you choose to keep it to rent out, I would recommend that you find a rental property management company to deal with finding tenants and collecting rent.

Maintance cost, tax.

How to value a property during market downturn?

Housing market continues to slump. Now we can calculate true value of a property easily. As price decline, we don't need to guess and factor in the potential price appreciation while calculating home value. Without the guesswork, figures are more accurate.

Let's use following example:

Today, a typical 15 years old, two bedrooms condo/townhouse is priced around $500,000 and $550,000 in Sunnyvale, California. Rent for similar condo/townhouse is $2000/month.

If you are a home owner, $2,000/month in rent means $20,000 a year in profit ($24,000 per year in rent, minus $4,000 maintenance costs). A $20,000 income is equilevant of owning $400,000 bonds or CDs, because current yield of 30 Years U.S. treasuries are 5% (5% of $400,000 is $20,000). Bank CDs have similiar yields.

In our example, the two bedrooms condo/townhouse is 20% to 25% overpriced. They should be priced at $400,000.

It is interesting to note that if we redo the calculation from buyer's perspective instead of seller's perspective, the figures are even more shocking.

Mortgage payment consists of two parts: mortgage interests and mortgage principal. The interests portion is similar to rent. If you pay interest, it disappears and doesn't add equity to the property. To fully simulate characteristics of renting, we assume buyer will apply for a zero down, interest-only loan.

It turns out that rent of $2000/month is equivelant to mortgage payment of a $340,000 loan at 7.0% APR. And comparing $340,000 loan to $500,000 or $550,000 price tag, from buyer's view, the two bedrooms condo/townhouse is 30% to 35% overpriced.

One may ask, why is there a discrepancy between two perspectives of the buyer and owner?

The discrepancy is a result of 2% differences in interest rate that buyer borrow comparing to yields of bonds and CDs that owners would get. We understand that buyer would always pay more. That is the premium of buying to own. However, looking from home owner's perspective, current housing market is probably 20% to 25% overpriced. We recommand investors to wait for a better entry point.