Investors are interested
in homes that create
positive cash flow
and that have excellent upside appreciation. However, considering the volatility of the current market, investors are focused more on cash-flow in order to mitigate risk.
We use Monthly Rent Ratio to determine the viability of an investment in terms of cash flow. Monthly Rent Ratio is calculated as follow:
Gross Monthly Rent / Total Investment
Where Total Investment = Purchase Price + Total Repair. For example, a home is purchases for $35,000 and requires $20,000 of repairs. The home rents for $850 per month and the monthly rent ratio is:
$850 / $55,000 = 1.55%
RPIG believes that in today's market a good investment property will generate a minimum monthly rent ratio of 1.15% or better.
RPIG believes that the market must eventually return to at least replacement costs once the surplus of foreclosure homes are absorbed into the market. RPIG cannot speculate how long this will take. However, RPIG uses a very conservative price per square foot estimate of $75 to estimate the potential upside appreciation for an investment. For example, if the home in the example above is 1,300 sq feet, the replacement costs would be:
$75 x 1,400 = $105,000
Potential appreciation in this example would be $50,000
($105,000 - $55,000). RPIG believes that in today's market a good investment property will create minimum appreciation potential of $35,000.