Your goal with a rental property is positive cash flow and/or appreciation in value.?It's important to determine which one (or both) you want because it will?determine if you will be able to achieve them with a particular property.?For instance, you may be purchasing a property for it's future appreciation and therefore you are willing to lose money on a monthly basis in exchange for future profits.
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In the simplest terms, you need to analyze your income and expenses. Do you have to put in an initial capital investment for renovations? Don't forget to account for vacancies. When buying a rental, the seller should give you the rent rolls, and information on monthly expenses, etc. You will need to analyze the sales price, interest rate of your loan, taxes, future appreciations of rents, costs to run the property, the list goes on.
There are certain numbers that are used that will help you evaluate?the rate of return on a property and compare one from the other. There?is the Cap Rate. This is the Net Operating Income/Value (Sales Price).?There is also the Gross Rent Multiplier (GRM) which is the Market Value (Sales Price)/Gross Annual Income. This is just the tip of the iceberg. I highly recommend you do some research and get familiar with what to look for in an investment property. A great book is "What Every Real Estate Investor Needs to Know About Cash Flow...And 36 Other Key Financial Measures" by Frank Gallinelli, You can find it here: http://www.realdata.com/gallinelli.shtml
Good Luck!
Source: http://www.zillow.com/advice-thread/what-is-the-best-way-to-buy-rental-properties/478107/
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