When analyzing a buy and hold rental property what criteria are we looking for?
- Healthy market
- Desirable home
- Cash flow $200/mo or more
- 8% cash on cash return
📍 Good Market
How do we define a good market?
We already talked about how we are going to select a market.
Our goal with rental properties is to NEVER lose money or need to pull money from our long term savings. We will ensure each property has a reserve fund set up to handle unexpected expenses and budget for vacancy and other standard expenses. But if we buy the right property in the right neighborhood we should be able to have a positive ROI from year 1 to year 30.
💸 Cash on Cash return
A measure of return on your initial investment after your first full year of ownership. It is equal to your net cash flow after all expenses and loan payments divided by your initial investment amount. We are looking for 8%+ to justify this money being put here versus an index fund tracking the S&P500
🏠 Desirable Home
To us, a desirable home is one that allows a family to be comfortable. For that, we are going to consider homes that are 3bd, 2ba with a back yard big enough to enjoy. Why? Because it’s our belief that a 2bd 1ba house is more suited to single people or families in between houses. We want to provide long-term options and longer-term leases so more space is required.
💸 Cash flow
In order to be excited about the opportunity, we want to see a minimum of $200/mo. in cash flow. This is very low to start and we are setting our expectations here due to a hot real estate market. In the future, we would like to see this dramatic increase. If we want rentals to replace parts of our income we need the unit economics to increase.