This technique can be translated into real estate in a way that you can shorten the amount of time you take to analyze a deal while still not rushing into a decision that isn’t right for you. In either case, you can see that the rule of thumb is an approximation, or a quick way to estimate a value. The term has also been associated with farmers who used their thumbs as a measurement to plant seeds the proper depth. The term “rule of thumb” is said to have originated with carpenters who used the width of their thumb to measure things. Keep in mind that each circumstance is different, so use each rule of thumb only as a guide. On the other hand, if the cash-on-cash return is 12%, then the investment meets our criteria and warrants further serious investigation. We’ll still examine the deal, but proceed with extreme caution. For example, our rule of thumb pertaining to cash-on-cash returns is that it must be producing a 10% return or more, which means that if the investment is only producing a 4% cash-on-cash return, it’s a big red flag to us that the asset is under-performing. Using rules of thumb will give investors an idea if the property is worth consideration. It’s important for beginner investors to learn certain investing criteria and formulas in order to properly analyze investment properties. Investopedia defines a rule of thumb as “a guideline that provides simplified advice regarding a particular subject,” and we’re here to show you that by adhering to several rules of thumb, you can be on your way to a successful career in real estate. When it comes to investing in real estate, it’s not as complicated as some make it out to be.
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