It is very important that you are very disciplined with your budget if you want to invest in income properties. If you are buying a house for yourself then it can be okay to overspend a little if you really like the house. This is never the case when you are investing in income properties. When you are buying a property as an investment then the numbers are king. You need to know how much a property can earn, how much you can pay for it and how much you need to spend in improvements. Most properties will need some changes or improvements to maximise their potential.
How much can you earn
The first thing you need to consider when you are calculating how much you can pay for a property is to decide how high return you want to get on your investment. The return needs to be higher than the interest rate you pay on the mortgage on the house. If not you will lose money. It should also be high enough to cover the running maintenance. How much you can expect to earn varies between different areas, and different investors have different goals. Some investors are happy as long as they can keep their returns above 5% while other investors prefer to keep this number above 10%. Achieving a 10% return can be hard in many markets.
I recommend that you try to keep your return above 7.5%.
How much can you pay
We can now calculate how much you can spend on buying the house. Let us pretend that you are looking at a house and after looking at comparables for the area you think you can rent the house for USD800 a month / 9600 a year. The house is in good condition, but you calculate that you will need to spend USD 5000 to perform minor improvements.
You can now calculate that you can spend 9600 / 0.075 (7.5%) = 128 000 – 5000 (improvements) on the house. If you spend more than that, then you will find it very hard to earn the return you want. 123 000 is not a lot of money when you are looking for a property, and it can be hard to find a property in this price range. This is especially true in many urban areas. Luckily many urban areas have higher rents which allow you to earn more money from your properties and you can, therefore, pay more when you buy them.
Finding a property
There is no secret way to find cheap properties that are suitable for turning into income properties. You will need to devote a lot of time looking at real estate listing to find them. You are more likely to find a good listing on Craigslist or another marketplace where the owners can list their property directly.
Scour all the different listings you can find. The more listings you read, the more good deals you will see.
It can sometimes be a good idea to ask the neighbours around an empty house to see if it might be for sale. This is extra true if the house has been empty for a long time. The best deals you can find are usually those that never gets listed. Those where you contact the owner directly and see if they want to sell.
Property auctions can often be a very good way to find properties that are suitable to be turned into income properties. It is often possibel to find properties that sell well below their value on the open market. This is especially true if you are willing to consider buying a fixer upper. Buying a property in an auction can however be risky since it can be hard or impossible to properly inspect the property before you buy it. Auctions are an high risk high reward environment.