So, I’m thinking of purchasing a house for myself. Of course, during the search, I started considering how to evaluate purchasing as a rental property. Anyone have advice on how to properly evaluate either of these purchases. I know that buying a home to live in tends to be a miserable investment, but you have to live somewhere of course. I’m finding that a lot of resources are either too simple (ie Rich Dad Next Door style of “buy real estate and become rich”) or too academic and don’t help me evaluate the cost of having a rental property sit without a tenant for months.
Do you know the CAP rate? Capitalization rate uses NOI and market value of the property.
NOI would be rental income less costs associated with the management and ownership of the property.
Cap rate = Annual NOI / market value of property
Suppose you can get 50,000 USD annual from net rentals (NOI) and the market value of the property is 500,000 USD that year. Cap rate is 10%. This would also mean you getting aprox a ROE of 10% and also is saying you can be paid back in 10 years if numbers don’t change.
However, this measure is not preferable over a FCF model, just as a fast tool.
Cap rate works well when NOI is smooth over time.
Cap rates are supposed to mantain over time, because if property value increases, then rentals also should rise. Market Crisis like 2007 can change the assumptions.
A Real Estate is considered good when its cap rate is around 10% to 15%.
Also consider the market perspective. RE prices are going to fall? Will mantain or rise? Higher prices in the future are in many cases the source of wealth increase of RE owners, so “buy real estate and become rich” is a true legend. Why? RE market lacks asymetry of information, so there are many “arbitrage” opportunities. Choose wisely.
First, don’t evaluate your primary residence as an investment. It’s not. It’s a place to live.
Second, Rich Dad Poor Dad is the all-time worst financial book ever written. Period. The only reason I have a copy is so when people say “I read it in RDPD” I can look it up and see exactly what error they’re talking about.
The best way to use RDPD is for fireplace kindling.
Tinder, actually.
He uses Rich Dad, Poor Dad to pick up chicks on Tinder. He really is a magician.