If you are newer to investing, moving out of your house, but keeping it as a rental, or experienced but don’t have the finance background, you may be wondering, “How do I know if a rental investment is a good deal in Baton Rouge?”. I’m here to help with a couple easy rules of thumb that many investors use. These “rules” are just to see if you are on the right track, and you should do a full analysis looking at all the money coming in (revenue) and money going out (expenses) every month, as well as consider long term expenses like roofs and AC units before you pay any earnest money.
So… Without further delay, here are our two favorite rules to answer your question, “How do I know if a rental investment is a good deal in Baton Rouge?”.
BatonRougeInvestors.com’s Rules for Evaluating a Rental Investment:
1: The 1% Rule (Or 2% Rule)- This rule is the foundation to weeding out potential rental investments. It is also incredibly simple. All it states is that the monthly rent should be at least 1% of the purchase price if you want to cash flow (have money coming in instead of having to pay). So to make things easy, you buy a rental property for $100,000 all in (purchase price and renovations). It needs to rent for AT LEAST $1,000/month or you will likely lose money. The 2% rule is the same idea, but you would get $1,000/month from a $50,000 property (great deal!).
The Good – It gives you a very easy estimate for the price range you should look for. If a 3 bed 2 bath in the neighborhood you want to invest in rents for $1,200, you know to look for homes $120,000 or less. It also is very quick to do.
The Bad – It oversimplifies things, and you need to know your rents well. You may get tenants in the first week, but then they disappear half way through their lease, or stop paying and you have to evict them. Or, you didn’t do many renovations before renting it and the AC failed the first year. These situations will make it very difficult for you to make money. You can read more about its limitations here.
Summary – This rule won’t guarantee you won’t lose money, but if you don’t follow it, it will be very difficult to make money. I shoot for the 1.5-1.75% rule.
2: The 50% Rule – There are two parts to evaluating a rental. Revenue and expenses. Revenue is easy. It’s the rent. Expenses on the other hand include things like utilities, property taxes, repairs and maintenance, capital expenditures, property management, and vacancy allowance. That is a lot to figure out, and with experience, you will have a pretty good idea of exactly what those numbers will be for a given property. This does not include your mortgage payment. But for now, assume it is 50% of your rents. $1000 in rent every month, $500 out the door or held for future expenses.
The Good – It probably overestimates expenses, so you will end up making more money. It will help you understand the big picture.
The Bad – It isn’t accurate. Big expenses can catch you off guard. You may self manage or do repairs yourself, so you won’t have property management and repair costs will be lower. Or you may be terrible at hiring people and overpay. Tenants may leave the water on for two days because you charged them a late fee.
Summary – This rule is a rough (like some of the houses we sell rough) estimate of your expenses, and paired with the 1% rule should get you on the right track. You can find your estimated monthly cash flow by taking your rent, subtract expenses (50%) and finally subtracting out your mortgage payment. That number needs to be greater than zero or you will go bankrupt quickly.
Anything Else?
We can help you analyze properties, as well as sell below market properties that are much more likely to meet those rules than properties from the MLS. Give us a call anytime, or fill out our form. We are happy to chat. “How do I know if a rental investment in Baton Rouge is a good deal?” These “rules” can help as loose guidelines to make sure you are on the right track, you need to really nail down all the expenses before you start making offers, and we can help.