Purchasing a rental property for investment requires a thorough analysis of future rental income compared to the cost of owning that property. In general, property owners would want to create a cash flow greater than the costs.
For example, let's say an investor is looking to purchase a home priced at $150,000, with the goal of renting the home out for income. If the investor places $0 down payment, then he needs to borrow $150,000. The one percent rule says that the home would have to be rented for no less than $1,500 per month ($150,000 * 1%) to be a good income property.
Similar to the 1% rule, Rental Index allows us to search for good rental income properties based on the Estimated Monthly Rental Income and the Listing Price.
A Rental Index of greater than 1.0 means a property can create cash flow to cover all monthly expenses of owning the property, with $0 down payment.
Every buyer has his/her own Rental Index
Generally speaking, a buyer usually puts 20% down payment when purchasing a property, so a Rental Index of 0.8 or greater can be a good rental income property for the buyer. On the other hand, if a buyer has to borrow a loan with a very high interest rate, he may need a property of Rental Index of 1.2 or greater.
Bottom line, the Rental Index is a general rule of thumb to decide if a property can be a good rental income deal. The higher the Rental Index, the more positive cash flow the property can potentially generate.
Location: Grand Prairie, TX
List Price: $59K
MLS Deal Finder Estimated Rent: $1,404
MLS Deal Finder Rental Index: 2.38
This rental income opportunity is located at Grand Prairie. Priced at $37/sqft, this property is hugely discounted from the 4 sold comps we found in the same subdivision, which have an average sold price of $68/sqft.
In addition, based on the rental comps in the same subdivision, MLS Deal Finder estimated monthly rental value is $1,404 with minimal updated needed, yield a whopping Rental Index of 2.38 - this is a fantastic income opportunity for buy-and-hold investors.
Location: Fort Worth, TX
List Price: $85K
MLS Deal Finder Estimated Rent: $1,099
MLS Deal Finder Rental Index: 1.29
This property has an estimated rental price is $1,099 in month, an attractive opportunity for a buy-and-hold investor.
Location: Lewisville, TX
List Price: $133K
MLS Deal Finder Estimated Rent: $1,467
MLS Deal Finder Rental Index: 1.10
A Rental Index of 1.1 makes this an interesting find for investors looking for rental income deals in Lewisville.
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