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Formulas Used in Investment Property Purchases

Investment property purchases can be a tricky business when it comes to paying the inherent value when buying the property and ensuring you are not over paying. Although some degree of overpricing is inevitable in selected markets where dwellings are at a premium, in most other areas, the depressed housing market almost guarantees good appreciation when the economy starts improving.

In any case, a lot of landlords use formulas to arrive at valuations for rental properties, though these may not always work and can at times be at total variance to what local property prices are ruling at.

Even then a good thumb rule is to pay a maximum of 70% of the expected market value of a property after all repairs, renovations and improvements are carried out, the costs of which are taken out of that 70%. Another method would be to pay between 6 to 8 times the total rent expected to be made in the first year, for each unit.

In any case, rental income must cover costs like the mortgage payments, taxes, maintenance, repairs, insurance, etc. with provision kept for a vacancy rate of at least 5%, which is the expected time for which a property is going to remain unoccupied in each year.

Even if the rental income only suffices for a person or business to break even, price escalations over longer periods and tax discounts for rental property will ensure that there is some profit in investment property purchases. So, it is a very good idea to evaluate a property un-emotionally before actually purchasing it.

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