Run The Numbers Before Buying An Investment Property
Topics: real estate, investment, cashflow, real estate calculator, austin real estate
People talk about running the numbers before buying an investment property, but before doing that we need to discover what are the numbers and how do you get accurate numbers. Running the wrong numbers can make the difference of making $500 or losing $1000 per month. In this article we will go through the costs and factors to consider to make your investments successful.
RENTAL INCOME
Rental income is not as straight-forward as it seems. 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. 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 $3200.
MORTGAGE INTEREST
A huge cost is mortgage interest. You should definitely sort out the details of your loan options and get an idea of current rates before running the numbers. It could make or break a deal. If you are getting a duplex or a house, the loans are generally similar to other home loan programs. Triplexes and fourplexes tend to have higher rates, and commercial is a whole other ballgame. 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. Another consideration is the type of loan. 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.
Basically, just get educated about the loan options and run the numbers with them. Oh, and also, do not just take advice from one mortgage person. The best way to get educated is to talk to a variety of mortgage brokers and banks to find your best solution; not all loan places have the same programs.
TAXES
People frequently use the taxes from the year when they purchased the property, assuming the taxes will stay the same. Taxes change every year. Taxes can go up drastically after a purchase. For example, an owner occupied property usually has tax breaks, so unless you intend to owner occupy too, your taxes will go up.
Also, the county appraisal that your taxes are based on could go up after your purchase. For example, if you buy a property for 100,000 but the tax appraisal last year was for 50,000, don’t count on it remaining at 50,000. In fact, I have seen cases where a year after a property was purchased the tax assessor increased the appraisal value to the purchase price. The safest approach is to look at the tax rate and the purchase price to determine your future taxes.
VACANCY COST
For some reason people tend to forget to take into account vacancy rate. 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. Do some investigation, look at your market and find statistics on the average vacancy rate.
TENANT TURNOVER COST
We have personally found the biggest surprise to be the expense of tenant turnover. This includes advertising for a new tenant, cleaning, repainting, replacing carpet, etc. If you expect to have high tenant turnover, like next to a college campus, anticipate this to be a significant cost.
INSURANCE COST
Insurance on investment properties are typically higher than owner occupied, single family properties. So get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. You also should purchase liability insurance which can be expensive.
MAINTENANCE COSTS
This is by far the most difficult number to estimate. It depends on the property, whether you fix some of the problems yourself or hire outside help, and random luck. 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. If it’s brick you won’t have to paint or worry about wood root. Decks need constant maintenance. A property with wood or concrete floors will be easier to clean and will not have to be replaced when a tenant moves out. 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. For instance, say there are two properties for sale for 200,000 and each have a combined rent of 2000. A 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. The larger property will be more expensive to maintain when you are replacing the larger roof, painting the interior walls, etc. Also, more units mean more money spent on advertising, make-readies, and more appliances to repair.
**Property Location – Consider your proximity to the property. 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? For instance, when a unit needs painting will you paint the rooms or hire a painter? 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.
UTILITY COSTS
Be sure to check what the tenants pay for and what the owner pays for. This includes all the utilities and lawn maintenance. In addition, there may be owner expenses like parking lot lights and trash bin service.
PROPERTY MANAGEMENT COSTS
If you are going to hire a property management company, definitely get their rates. We personally choose properties that we can manage ourselves.
SUMMING THE NUMBERS
Once you add all the numbers up, you often find the property has 0 cash flow or even negative cash flow. This doesn’t necessarily mean you should not purchase the property. 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. Also, if you think the property is going to appreciate in the future, a zero or negative cash flow property could still be appealing.
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.
Located in Austin Texas www.escapesomewhere.com Escapeso Austin Real Estate offers potential investors with advice and expertise about the Austin Real Estate market. Their website offers a free Home Search of the Austin MLS along with description of the different downtown Austin Condos.
Previous Articles Highlighter:
Are You Using An Ad Tracker To Track Your Affiliate Sales? (1)
By utilizing an affiliate tracking campaign, you will then be able to determine which of your ad campaigns are working out the best for you and which ones are not.
Small Business Marketing: Five Simple Steps To Get Three New Clients, NOW! (2)
Truly, if you follow up with your follow up, you will have a never-ending source of referrals and you will never again have to attend another boring network marketing event!
Days Devoted To Family Bowling (3)
Bowling alley has unique lanes that are perfect for novice bowlers to use. They equip several lanes in the bowling alley with rubber bumpers and every child is almost guaranteed to knock over a bowling pin or two on each lane that they roll a ball down.
Some Pros And Cons Of Owning Real Estate (4)
Unlike cars, which depreciate with wear, and stocks, which you can't ever see or play with, your home can be a secure and enjoyable investment if you choose to live in it.
Is A Work From Home Franchise Business Right For You? (5)
Normally, marketing the business is the sole responsibility of the franchisee, and this may limit the reach of your marketing campaign to your own town or city. Finally, as a home-based franchisee, your business practice will be isolated.
All About Flash Drives (6)
Moving forward, we got to meet and appreciate the infamous floppy disks where we can store our data in and be able to take them with us anywhere we go.
Using Golf Rules Effectively (7)
The rules of the United States Golf Association will help a new golfer learn all about responsibilities. The player is responsible for using the right equipment, practicing golf to achieve a definitive purpose, and learning the game well so that they can one day offer some valuable advice to another golfer that is new to the game.
The Breton Language - A Languages Of The World Primer (8)
The launch of a regional TV station, TV Breizh, has given new impetus to Breton amidst growing regional demand for increased recognition of the language. Stranslations.com offers professional language translation services in English, French, Spanish, German and other major European languages.
Concealing A Mini Camcorder (9)
Topics: miniature video recorder, cell phone camcorder, hiding a camcorder You have the ability to hide a mini camcorder and use it for many different types of sneak camcorder attacks whenever you choose.
The Downside To Videoconferencing (10)
The downside to videoconferencing exists. Therefore, errors glitches in technology and inefficient use of videoconferencing exist. Videoconferencing is a pros and cons decision; once the cons are identified, you can attempt to learn how to troubleshoot these issues.
Newer Articles Highlighter:
Busy Children Learn While Playing Soccer (1)
Soccer was good for children in so many ways and parents really like the game because it helped their children improve their teambuilding skills. Parents like watching their children play soccer.
What Does It Take To Start A Blog? (2)
Keep putting up solid posts, being responsive and working on marketing your blog should eventually get you some good results. Stephanie Foster blogs at www.aspectsofhomebusiness.com about running her home business.
Finding Your Maximum House Price (3)
The higher the rate, the more your payment. 4) The property taxes of the area where your property is located. Again, the higher the tax rate and higher the appraisal values, the more dollar amount you will pay each month.
Why Have A Realtor? (4)
A good Realtor has the knowledge and skills to guide a Buyer into the right neighborhood. Taking into account price, location, and style, it is quite the balancing act to determine where someone will be happy living.
The Two Sides Of Gentrification (5)
1) Will the families indeed be displaced? Though often older families can not afford to pay the increasing property taxes that come with an area's appreciation, many times they can.
Evaluating The Different Options Available For Downtown Austin Condos (6)
www.escapesomewhere.com Austin Real Estate Group is a husband and wife real estate team located in Austin Texas. Their site has a free search of the Austin Real Estate market.
Affilliate Link Cloaking And How It Helps To Optimize You Business (7)
With this type of system, you can be assured that any and all commissions will end up in your pocket exactly where they belong. A lot of people when disguising their affiliate urls will think they have it hidden beyond the commission thief's eyes, but in reality they haven't.
Are You Running Different Ad Tracking Campaigns? (8)
Topics: marketing campaign, advertising campaign, ad tracking, ad tracker There are a lot of ways that a person could advertise their business. Of course it will depend on the size of your business and the size of your advertising budget on which ad campaigns to go with.
Choosing The Right Ad Tracker For Your Business (9)
There are hundreds of people on the Internet that claim to have the best software on the Internet for things like ad tracking. They will charge you hundreds of dollars for a product that really is not effective for your business and they will continue to charge you money for any support you may need after the purchase.
Should Your First "House" Be A Duplex? (10)
And our article is not proposing that everyone should buy a duplex. We are simply showing the financial benefits of buying a duplex. If you are looking to purchase a home or duplex in the Austin Real Estate www.escapesomewhere.com market Ki can help you in your search.
Permalink to Run The Numbers Before Buying An Investment Property