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