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Run The Numbers Before Buying An Investment Property
eople talk about "running
the numbers" before buying MORTGAGE INTEREST
an investment property, but
what are the numbers and how do A huge cost is mortgage interest.
you get accurate numbers? Running You should definitely sort out
the wrong numbers can make the the details of your loan options
difference of making $500 or and get an idea of current rates
losing $1000 per month. In this before running the numbers. It
article we will go through the could make or break a deal. If
costs and factors to consider to you are getting a duplex or a
make your investments successful. house, the loans are generally
similar to other home loan
programs. Triplexes and
RENTAL INCOME fourplexes tend to have higher
rates, and commercial is a whole
Rental income is not as other ballgame. One thing to
straight-forward as it seems. consider is to put more down
Sometimes properties are because the more you put down,
under-rented and sometimes the less your loan will be, which
properties are over-rented, so be means less monthly interest to
sure to find out the market rents pay. Another consideration is the
when you consider a property. type of loan. We usually
When we bought our first recommend for people to get a
fourplex, we looked at comparable fixed rate mortgage these days
leases and realized our rents because the current ARM
were too high, so instead of (adjustable rate mortgage) rates
assuming we would continue to are not all that much lower than
receive $3600 of rental income, fixed rates.
we had to be realistic and assume
it was more like $3200. Basically, just get educated
about the loan options and run count on it remaining at 50,000.
the numbers with them. Oh, and In fact, I have seen cases where
also, do not just take advice a year after a property was
from one mortgage person. The purchased the tax assessor
best way to get educated is to increased the appraisal value to
talk to a variety of mortgage the purchase price. The safest
brokers and banks to find your approach is to look at the tax
best solution; not all loan rate and the purchase price to
places have the same programs. determine your future taxes.
TAXES VACANCY COST
People frequently use the taxes For some reason people tend to
from the year when they purchased forget to take into account
the property, assuming the taxes vacancy rate. Even when looking
will stay the same. Taxes change to invest in a desirable rental
every year. Taxes can go up area, it's best to always take
drastically after a purchase. For into account at least an 8-10%
example, an owner occupied vacancy rate. It's best to do
property usually has tax breaks, some investigation, look at your
so unless you intend to owner market and find statistics on the
occupy too, your taxes will go average vacancy rate.
up.
TENANT TURNOVER COST
Also, the county appraisal that
your taxes are based on could go We have personally found the
up after your purchase. For biggest surprise to be the
example, if you buy a property expense of tenant turnover. This
for 100,000 but the tax appraisal includes advertising for a new
last year was for 50,000, don't tenant, cleaning, repainting,
replacing carpet, etc. If you into account.
expect to have high tenant
turnover, like next to a college • Property Type - When you
campus, anticipate this to be a evaluate different properties
significant cost. remember to take into account the
type of property. If it's brick
INSURANCE COST you won't have to paint or worry
about wood root. Decks need
Insurance on investment constant maintenance. A property
properties are typically higher with wood or concrete floors will
than owner occupied, single be easier to clean and will not
family properties. So get an have to be replaced when a tenant
insurance quote on the property moves out. Just think about the
instead of basing your expected aspects of the property and their
insurance off of the insurance maintenance costs.
bill for your house. You also
should purchase liability • Property Size - A smaller
insurance which can be expensive. property is easier to maintain
than a larger property. For
instance, say there are two
MAINTENANCE COSTS properties for sale for 200,000
and each have a combined rent of
This is by far the most difficult 2000. A property with 2 units and
number to estimate. It depends on a total of 1000 square feet will
the property, whether you fix be cheaper to maintain than a
some of the problems yourself or property with 6 units and 3000
hire outside help, and random square feet. The larger property
luck. So we can't give you a hard will be more expensive to
and fast number but we can look maintain when you are replacing
into different factors to take the larger roof, painting the
interior walls, etc. Also, more for. This includes all the
units mean more money spent on utilities and lawn maintenance.
advertising, make-readies, and In addition, there may be owner
more appliances to repair. expenses like parking lot lights
and trash bin service.
• Property Location - Consider
your proximity to the property. PROPERTY MANAGEMENT COSTS
If you buy a property 30 miles
away, over the course of a year If you are going to hire a
you can spend a decent amount of property management company,
gas money driving back and forth. definitely get their rates. We
personally choose properties that
we can manage ourselves.
• Your personal management
style - How often will you do SUMMING THE NUMBERS
maintenance work yourself vs
hiring help? For instance, when a We wrote a investment property
unit needs painting will you calculator which is located here
paint the rooms or hire a http://www.escapesomewhere.com/cg
painter? Hiring professionals is i-bin/real_estate_calculator_html
definitely more expensive, but .pl?view=cashflow_analyzer. Once
you have to be realistic about you add all the numbers up, you
how much you will personally do, often find the property has 0
especially if you are looking at cash flow or even negative cash
a lot of units. flow. This doesn't necessarily
mean you should not purchase the
UTILITY COSTS property. There are positive tax
benefits to rental properties and
Be sure to check what the tenants depending on your situation, a
pay for and what the owner pays property with technically 0 cash
flow could still put more money
in your pocket due to tax The point here is that if you are
benefits. Also, if you think the buying a property with zero or
property is going to appreciate negative cash flow, it's best to
in the future, a zero or negative know beforehand instead of after
cash flow property could still be the property has been purchased.
appealing.
About the Author:
Ki Gray http://www.escapesomewhere.com
Source: www.isnare.com
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