If you’re thinking of buying a rental property right now, STOP!  Do you know what you should ACTUALLY pay for that property?  I’m Bryan Ellis.  I’ll tell you how to know if you’re overpaying RIGHT NOW in Episode #112 ---------- Welcome, my friends, back to another exciting edition of the podcast of record for self directed investors the world over! Let’s talk about rental properties, shall we?  Many of you have the impression that I disapprove of owning rental property, or that I somehow disapprove of the notion of “turnkey” rental properties, in which you buy a rental property from a company who also stocks the house with a tenant and selects a property manager so that all of that stuff is in place without your having to do anything. Both of those things are wrong.  I absolutely approve of owning rental property.  And I absolutely approve of solid turnkey rental deals. But let’s be careful to pay the right prices, ok?  Remember:  The core value of a self-directed investor is to RESPECT YOUR OWN CAPITAL… and the most basic, fundamental way to do that is to NEVER, EVER pay too much for an investment. So what is the right price to pay for a rental property? Let’s start with what ISN’T the right price. Do this:  Before you buy your next rental property, call up a real estate agent in the area.  Ask them what that property would sell for on the open market.  Whatever they tell you is a good approximation of the retail value of that property. The right price for you to pay for a rental ISN’T the retail value.  You must pay LESS than that. My friends, remember this:  you will be successful primarily as a result of getting good deals.  What makes for a good deal?  Property bought below it’s retail value.  How much below?  I’d say 10% below is a good starting place.  15-20% or more is better.  But what does NOT make any sense is to pay full retail value for that property.  Paying retail is for bush league investors who don’t know what they don’t know.  That’s not you… now you know better. But I’d like to give you a warning.  Many people selling turnkey rental property will try to confuse you by basing their pricing on something called cap rate, or capitalization ratio.  Honestly, if you hear the word “cap rate” in connection with single family houses, somebody is probably trying to confuse you.  It’s VERY, VERY easy – repeat, VERY easy – to do some financial magic such that it looks like your “cap rate” is very high, at 12-15% or more.  They want to do that because it’s easy to justify charging higher prices for the property when you perceive the rate of return to be stronger. My friends:  Repeat after me:  Cap rate doesn’t matter.  What DOES matter is the REAL VALUE – what would the house sell for on the retail market?  And then, you ALWAYS pay LESS than that number! Folks, this is one of those places where your intelligence actually puts you at a disadvantage.  If you’re like 95% of my audience, then you’re a smart, successful person who is probably an engineer or a sales person or a computer programmer or a physician or some other type of professional who is very good at your job, and it’s likely you have a high income.  It’s also likely you’re not a real estate expert, and that’s OK! Here’s the thing:  Like me, and like everyone else, you simply don’t know what you don’t know… and like me, you may be inclined to think that because you don’t see any holes in the argument being put in front of you, that there are, therefore, no holes in the argument.  And buying a turnkey rental property presents a fertile ground for you to be confused while falsely feeling very confident.  What happens is that you are redirected to focus on other issues like CAP RATE or the potential for tax savings through depreciation or discussions about the difference between “nominal” and “actual” dollars, and of course, why real estate is such a great hedge against inflation. My friends, all of that is interesting stuff, but it’s not relevant at the point of