Buying a house to rent out for good profit: Quick check tips

Buying and renting real estate is a popular form of real estate investment in Vietnam today. Investors often reap many benefits from this type of business due to its stable profit potential and ability to accumulate assets over the long term.

However, investing in rental properties also carries certain risks. Even though you own a property, it's not always easy to find tenants or generate a stable rental income. Furthermore, management, maintenance, and repair costs can also impact the investor's profitability.

So, is there a way to determine if a property is worth investing in for rental income? BiggerPockets – the largest social media platform for real estate investment in the US – reveals the 2% rule to help investors quickly assess potential real estate deals.

Apply the 2% rule.

The 2% rule is a simple but effective tool used to make a preliminary assessment of the profitability potential of rental properties. According to this rule, the monthly rental income of a property should be equal to or higher than 2% of the property's purchase price to be considered a profitable investment.

First, you need to determine the amount of money needed to purchase the property, including related costs such as taxes, fees, and brokerage services. Next, you need to calculate the expected rental income.

You can collect this data yourself or through professional real estate brokerage firms.

If the monthly rental income is equal to or higher than 2% of the purchase price, this property has the potential to be a good investment.

If the monthly rental income is less than 2% of the purchase price, this investment may not yield the expected return. If you still want to invest in this property, you will need to adjust the rental price or reduce operating costs to achieve the desired rate of return.

For example, let's say you buy an apartment for 2 billion VND. According to the 2% rule, the minimum monthly rental income to ensure a good return is 40 million VND.

A real estate complex in Hanoi (Photo: Tran Khang).

If the rental income reaches 50 million VND per month, it indicates a potentially profitable investment. Conversely, if the rental income is only 30 million VND per month, you need to consider adjusting the rental price or reducing expenses to achieve the desired return on investment.

However, the 2% rule is only a rough estimate and does not guarantee absolute accuracy for the profitability potential of any property. Many other factors affect the actual return on investment in real estate. For example, monthly rental income depends on the type of property, location, size and amenities, and market conditions.

Some alternative tools

The 2% rule is a simple and popular tool used by many investors to quickly determine the profitability of a rental property. However, this is just a general rule, and you still need to conduct a more thorough analysis before deciding to invest. You can use several other methods to gain a more diverse perspective before investing.

Firstly, there's the Gross Rent Multiplier (GRM). This metric calculates the ratio between the property purchase price and the total annual rent. For example, if a property costs 3 billion VND and the total annual rent is 300 million VND, the GRM would be 10. Generally, a lower GRM indicates a more attractive investment opportunity. However, a drawback of this tool is that it doesn't account for operating costs.

Secondly, there is Net Operating Income (NOI). This indicator calculates the annual return on a property after deducting operating expenses, before taxes and mortgage payments. NOI provides a clearer picture of the property's profitability. If the NOI is positive, the property generates enough rental income to cover operating costs.

Thirdly, there is Cash Flow Analysis. Cash flow analysis doesn't just focus on rental income; it considers all incoming and outgoing cash flows, including operating expenses, interest payments, taxes, etc. Positive cash flow is crucial for maintaining liquidity and ensuring sustainable profitability.

The fourth is the Capitalization Rate (Cap Rate). This measure calculates the annual rate of return on a property's total investment. The Cap Rate is calculated by dividing the NOI by the property's purchase price. A higher Cap Rate indicates a better investment opportunity but usually comes with higher risk.

Fifth is future value analysis. Instead of focusing solely on current profits, consider the future value of the property. However, this method often requires experience and knowledge of real estate.

By combining these alternatives, investors can build a comprehensive investment strategy to make more informed and well-rounded investment decisions.

Source: https://dantri.com.vn/bat-dong-san/mua-nha-cho-thue-de-sinh-loi-tot-meo-kiem-tra-nhanh-20240613105018738.htm