Establishing a Proper Price for a Multi-Unit Building
As a full time Canadian real estate investor, we must be very conscious of how we are spending our time each day. Considering time is our most precious commodity, we need to be spending it by doing as many deals as possible to be able to attract massive and passive income for ourselves.
We cannot base our decisions the information of one or two realtors. They will help you to a certain degree, but we must have our own methods that we can trust. I have experienced realtors that consider any multi-unit property a good investment. Some don’t realize that there are methods to determine the validity of the investment.
As a real estate investor, we must consider what kind of money we can be making on every property, and what is our return on investment, our cash on cash return.
Crunching the numbers
Crunching numbers takes time. Finding the accurate numbers to crunch takes even more time. We don’t want to have to do a full analysis on every property that crosses our desk. By a full analysis, I mean taking what the gross monthly income is, subtracting our monthly mortgage amount, property taxes, insurance, heating, hydro, vacancy rate, annual maintenance, and so on. All of these factors go into understanding fully if a property is actually going to cash flow.
How do we avoid this process
How can we avoid this lengthy process every time we see a multi-unit property?
The easiest and quickest way to understand if a property will cash flow is the 1% rule. The 1% rule simply states that the monthly gross income should be 1% of the purchase price. So if a property is getting $2,500 in gross monthly rent, the purchase price should be no more than $250,000. Any more than that and you are cutting into your bottom line. Any less than that and you are increasing your bottom line.
In less than a second, you are able to determine if the property will make money. There are a few factors, such as if the tenants are paying any utility, then this number can be slightly different, and the property purchase could be perhaps slightly higher than the 1% rule.
If the property indeed passes the 1% rule, then finding out the actual expenses and crunching the actual numbers is then an appropriate use of time.
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