Category: Finance, Real Estate.
People talk about running the numbers before buying an investment property, but what are the numbers and how do you get accurate numbers?
In this article we will go through the costs and factors to consider to make your investments successful. Running the wrong numbers can make the difference of making$ 500 or losing$ 1000 per month. RENTAL INCOME. Sometimes properties are under- rented and sometimes properties are over- rented, so be sure to find out the market rents when you consider a property. Rental income is not as straight- forward as it seems. When we bought our first fourplex, we looked at comparable leases and realized our rents were too high, so instead of assuming we would continue to receive$ 3600 of rental income, we had to be realistic and assume it was more like$ 320 MORTGAGE INTEREST.
You should definitely sort out the details of your loan options and get an idea of current rates before running the numbers. A huge cost is mortgage interest. It could make or break a deal. Triplexes and fourplexes tend to have higher rates, and commercial is a whole other ballgame. If you are getting a duplex or a house, the loans are generally similar to other home loan programs. One thing to consider is to put more down because the more you put down, the less your loan will be, which means less monthly interest to pay. We usually recommend for people to get a fixed rate mortgage these days because the current ARM( adjustable rate mortgage) rates are not all that much lower than fixed rates.
Another consideration is the type of loan. Basically, just get educated about the loan options and run the numbers with them. The best way to get educated is to talk to a variety of mortgage brokers and banks to find your best solution. Oh, and also, do not just take advice from one mortgage person. Not all loan places have the same programs. People frequently use the taxes from the year when they purchased the property, assuming the taxes will stay the same.
TAXES. Taxes change every year. For example, an owner occupied property usually has tax breaks, so unless you intend to owner occupy too, your taxes will go up. Taxes can go up drastically after a purchase. Also, the county appraisal that your taxes are based on could go up after your purchase. The safest approach is to look at the tax rate and the purchase price to determine your future taxes. For example, if you buy a property for 100, 000 but the tax appraisal last year was for 50, don, 000 t count on it remaining at 50, I have seen, 00In fact cases where a year after a property was purchased the tax assessor increased the appraisal value to the purchase price.
VACANCY COST. Even when looking to invest in a desirable rental area, it s best to always take into account at least an 8- 10% vacancy rate. For some reason people tend to forget to take into account vacancy rate. Do some investigation, look at your market and find statistics on the average vacancy rate. We have personally found the biggest surprise to be the expense of tenant turnover. TENANT TURNOVER COST.
This includes advertising for a new tenant, repainting, cleaning, replacing carpet, etc. INSURANCE COST. If you expect to have high tenant turnover, like next to a college campus, anticipate this to be a significant cost. Insurance on investment properties are typically higher than owner occupied, single family properties. You also should purchase liability insurance which can be expensive. So get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. MAINTENANCE COSTS.
It depends on the property, whether you fix some of the problems yourself or hire outside help, and random luck. This is by far the most difficult number to estimate. So we can t give you a hard and fast number but we can look into different factors to take into account. * Property Type- When you evaluate different properties remember to take into account the type of property. Decks need constant maintenance. If it s brick you won t have to paint or worry about wood root. A property with wood or concrete floors will be easier to clean and will not have to be replaced when a tenant moves out. For instance, say there are two properties for sale for 200, 000 and each have a combined rent of 200A property with 2 units and a total of 1000 square feet will be cheaper to maintain than a property with 6 units and 3000 square feet.
Just think about the aspects of the property and their maintenance costs. * Property Size- A smaller property is easier to maintain than a larger property. The larger property will be more expensive to maintain when you are replacing the larger roof, painting the interior walls, etc. If you buy a property 30 miles away, over the course of a year you can spend a decent amount of gas money driving back and forth. * Your personal management style- How often will you do maintenance work yourself vs hiring help? Also, more units mean more money spent on advertising, make- readies, and more appliances to repair. * Property Location- Consider your proximity to the property. For instance, when a unit needs painting will you paint the rooms or hire a painter? UTILITY COSTS. Hiring professionals is definitely more expensive, but you have to be realistic about how much you will personally do, especially if you are looking at a lot of units.
Be sure to check what the tenants pay for and what the owner pays for. In addition, there may be owner expenses like parking lot lights and trash bin service. This includes all the utilities and lawn maintenance. PROPERTY MANAGEMENT COSTS. We personally choose properties that we can manage ourselves. If you are going to hire a property management company, definitely get their rates.
SUMMING THE NUMBERS. Once you add all the numbers up, you often find the property has 0 cash flow or even negative cash flow. We wrote a investment property calculator which is located here Investment real estate calculator. This doesn t necessarily mean you should not purchase the property. Also, if you think the property is going to appreciate in the future, a zero or negative cash flow property could still be appealing. There are positive tax benefits to rental properties and depending on your situation, a property with technically 0 cash flow could still put more money in your pocket due to tax benefits. The point here is that if you are buying a property with zero or negative cash flow, it s best to know beforehand instead of after the property has been purchased.
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