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