I’ve mentioned before that investing in real estate has been a long-time hobby of mine and one I look to as a future source of passive income.
Admittedly, I’ve slowed down while focusing on other personal finance goals — namely my huge student loan debt — but still keep a finger on the pulse of it.
Value investing in real estate
There are tons of investment styles when it comes to buying real estate. For mine, I borrow methods made popular in equity investing by hunting for “value.”
With stocks, value investors chase prices that are low relative to some fundamental such as book value, earnings, or dividends. With real estate investing, the fundamental I’m most concerned with is the amount I can reasonably expect in rent.
Along this dimension, an ideal investment property is one where the rent I can charge is sufficient to leave me a little bit of profit after paying all the costs involved in owning — these include interest, insurance, and taxes.
Besides positive cash flow, which is always nice, value investing in real estate has also provided me with one other big benefit made obvious over the last few years: because I’m making money, I can just hold onto the property while the real estate market recovers without ever being forced to sell.
Alright, so there are a bazillion properties up for sale at any given time. How do I do anything in my day besides crunch all those numbers? Let’s start with some estimates about cost:
Obviously, these percentages can be higher or lower depending on the state you’re in, neighborhood realities, and so forth, but they’re close enough.
Take note of the monthly recurring cost of 0.8%, which has an arrow pointing at it. If you never ever rented a rental property, then every month, you could expect to lose 0.8% of your purchase price.
Thus, to make the math easy, to make a small profit, and to account for months when my rentals are empty, I only start to become interested in rental properties when their monthly rent is at least equal to 1% of their listed price. Call it a One-percent Rule if you want something that rolls off the tongue.
A New York example
All those numbers sound simple enough, right? You’d be surprised how often people tell me I should go below that number….
As an example, in Brooklyn where I live, properties that can be rented for $4,000 a month cost at least $1 million — a ratio of 0.4%!
And that’s why I’m not interested in buying here….
Alright then, what am I doing wrong? And how do you invest in real estate?