The No. 1 rule to buy rental property is to buy the property at less than 8x the yearly rent. This ratio of 8x yearly rent is called the Gross Rent Multiplier (GRM). If you can buy rental property at GRM 8 or less, you stand a good chance of making about 8% to 10% on your money, if you buy with cash.
Example:
If the house you want to buy can achieve a monthly rental of $1,500 per month, that would be in rent each year: $18,000 ($1,500 x 12 months).
$18,000 yearly rent multiplied with a GRM of 8 gives you a maximum property price of $144,000.
So, you should not pay more than $144,000 for this rental property. But your goal should be always to pay the lowest GRM you can find.
When you invest in rental real estate, you should be investing for cash flow, not price appreciation. Your object should be to start making cash profits on your investment in the very first year.
Sven Franssen