The real estate and housing market has been a hot commodity since the 2020 pandemic. Housing prices nationwide have skyrocketed, and homes move on and off the market quickly. All this works together to make the market attractive for investors. If you’re just beginning your journey in real estate, it’s critical that you understand investment percentages if you want to turn a profit.
This question is dependent on what you intend to do. There are different things that investors look at. Do you intend to buy and sell homes? If so, it’s the 70% rule you’ll want to keep in mind. As explained by Bob Vila’s Guide to House Flipping, this rule is, in essence, that a buyer never wants to purchase a home for more than 70% of the after-repair value. If you flip a home for $400,000 but spent $320,000 to purchase and repair it, you’ve broken the 70% rule and only netted a 20% profit from the sale.
If you plan to buy real estate in order to have rental properties, the 1%, and 50% investment rules are for you. The breakdown of these rules is that you should be able to recoup 1% of the purchase cost in monthly rent. If you buy a home for $250,000, the 1% rule dictates that the rent on that home be set at $2500 per month. The 50% works in tandem with this. Half of the income generated by your rental property will go toward maintaining the property, meaning that you should set aside $1250 of that $2500 for property costs.
These percentages aren’t hard rules. Your personal goals, changes in the market, and unforeseen events may change how close you adhere to them. There may be times when it makes sense to settle for a 20% profit instead of 30%. You may have months where property maintenance is lower than what you planned and other times when something unexpected pushes it much higher.
The important thing when it comes to figuring out where to put your money is to remain realistic about the risks. These investment percentages are a good guide to keep in mind and will help you avoid stretching yourself and your funding too thin.
We have a great team that can help you with your real estate investing, contact us to speak with our Investment Property Specialist!