With the number of homeowners declining, the demand for rentals increasing, prices and interest rates low, and the stock market in disarray, this is a good time to consider purchasing an investment rental property.  But before you buy, make sure you understand that what appears to be a great price isn’t necessarily what you should pay.

Most real estate investors in today’s market are looking for two things:  Building long-term equity, and cash flow.  Unless you simply need a write-off, a property should pretty much pay for itself through the rental income produced.  The potential rent is therefore an important factor in determining what you should pay for a property.

Before writing an offer on a single family home, a condo, or a multi-unit building, do your research.  If the property is currently rented, income information should be available from the owner or listing agent.  However, even in that case it is important to research the local rents to make sure the current rents match the market.   A good place to start your research is online, looking up similar properties for rent in the immediate geographic area.  Another method that works well in a condo complex is to simply walk around and ask people that you meet how much rent tenants pay for comparable units.  You’d be surprised how eager most people are to give you the information you need.

Once you know what you can expect to collect in monthly rent, determine how much cash you will put down and the amount of the mortgage you will have on the property.  The property should rent for no less than 1% of the amount of the mortgage.  Thus, if you purchase a property for $200,000, put 20% down and have a mortgage of $160,000, the monthly rent you collect should equal at least $1600 a month.

There are other considerations of course, such as taxes and HOA fees, etc., but this simple 1% calculation will serve as a good starting point to determine whether or not the property you are considering is worth the asking price.

Please don’t hesitate to call for more information about buying an investment property in Southern California.  There are some great deals that I’d love to share!