No one wants to be the last one on the bus, that’s a good way to miss out. That’s why so many people are looking at the recovering housing market right now and wondering if they’ve missed out on the record low prices that many houses. Fortunately, many experts say that there’s still plenty of room for prices to increase.
However, when investing in real estate to turn into a rental property, you don’t necessarily need to worry about market trends. While the amount of house you buy may be different depending on when you buy, the amount of money you spend shouldn’t depend on whether or not the housing market is up or down.
Instead, base your decision of how much you’re going to spend on the investment based on the amount of money you’ll spend on the new property and how much rent you can reasonably expect to get out of it.
One of the easiest ways to determine how much money you can spend on a house is by using a multiplier of how much you make per year on gross rent. Many experts recommend a gross rent multiplier of eight times the yearly rent you can get from the house.
As an example, say the property you’re interested in buying, you can reasonably expect to get at least $1,000 per month. By the end of the year, you’ll have made $12,000. Based on this estimate of how much rent you can reasonably expect to get from the market, you multiply the amount you’ll make every year by eight:
$12,000 * 8 = $96,000.
If you want your rental property to create a cash flow for you, then you should not spend more than $96,000 on whatever house you end up deciding to buy. Using this Gross Rent Multiplier (GRM) can help you avoid those situations like in 2008 when the market crash wipes out whatever gains you might have received during the bullish run on housing prices in the mid-2000’s.
When flipping properties, your chief concern should be whether or not you can improve the property and sell it at a profit. This strategy has helped many people to make money, but they were also the ones with the most exposure during the housing downturn five years ago. We saw lots of our investor friends lose money with the turn of the market.
While the window of opportunity to buy great properties for discounted prices may be closing, if you have and use a purchase and rent formula, you will be consistent in your valuation and take the emotion out of the purchase. This gives you the perfect blend between finding the right house you can flip five years down the road, and still make a great passive income today. The longer you’re able to hang onto your investment property, the better return.
This strategy may not give you the maximum profit, but it’s a very safe one that will protect you from the kinds of crash we saw during the 2008 downturn in housing prices. The recovering housing market shows every sign of life now and has become a very attractive investment for not only people like you, but also Wall Street investment firms.