While most of the larger real estate developers consider the return on investment, or KINGBefore committing to a specific project, in many cases, those who buy smaller investment properties often seem to fail doing so with the same degree of care and focus. For the purposes of this article, it will be understood as real estate, from 1 to 6 units, and for residential use. Many, instead of following this process, look at these buildings and properties in a similar way that they perceive, buying their personal home! However, it is important to realize, wise investors, to recognize and understand, an economic, return-on-investment mindset, to determine whether it is a smart investment or not. The same rules apply, basically, whether the rentals are stand-alone, houses, or up to 6 units. With that in mind, this article will attempt to consider, examine, review, and discuss some basic steps to consider before closing any deal.
1. How much to spend for the property: A conservative approach, to consider the correct price, to spend, should be, considering the total price, as far as net income is concerned, rolls. For example, an investment property, purchased for $500,000, must generate a net income of at least 6% per annum or $30,000. The net is derived, considering the total rents, minus the 20% to contribute, a reserve for vacancies and rotation. Then reduce this for expenses, including fixed ones, such as taxes, mortgage interest, landlord-paid utilities, and a reserve for repairs, renovations, and improvements. So, if the taxes on that property are, say, $8,000, and the utilities, $500, and the mortgage interest, another $6,000, and you set aside, 1% per year, for reserves ($5,000), so you need to add $19,500, to the equation. So you’ll need a total rent, after the 20% deduction, of $49,500 per year (or just over $4,100 per month). So the total rent collected, each month, should be about $5,166 (because you’ll need to budget, based on about $62,000, to create a safety net, to guard against vacancies, etc.).
two. Cash Flow: Look for positive cash flow, so by owning these types of properties, be as stress-free as possible. Compare the combination of your mortgage payments (including interest and principal), plus property taxes and maintenance/repairs/renovations/maintenance costs, to determine if you stay within 80% of the rental limitations.
3. Competitive Focus: What is the prevailing/typical rent charged in the specific area? Instead of focusing on being at the high end of the market, the best approach is often to be in the mid or low range and look for less turnover.
Four. Rotation: The best scenario is to meet income needs and projections, while controlling expenses. The lower the tenant turnover, the lower the landlord’s costs.
Investing in real estate, when done carefully, is a tried and tested approach, one that makes sense and typically brings many benefits, including asset value appreciation. Will you be a wise real estate investor?