For some people, owning and operating rental real estate is a great idea, while for others, this might not be the case! The difference not only applies to the specific property, but also to the personality, attitude and specific personal strengths and weaknesses of each individual. Some factors include, of course, the financial ones, including the necessary reserves, necessary to buy a property, starting with the down payment, closing costs, reserves for repairs, improvements, renovations and contingencies. Also, some people are more prepared to own a rental property than others, because some do not want the stresses and strains involved in this type of commitment. With this in mind, this article will attempt to briefly consider, review, and discuss some of the key factors and considerations that one should explore thoroughly, in depth, before taking the jump.
1. Personal finance: Do you have the necessary funds and will you qualify for whatever financing is required? Obtaining a mortgage on non-owner-occupied property is significantly different from the process when it comes to a personal home. In most cases, a larger down payment is required (often a 25% down payment, instead of 20%). In addition, the requirements differ, because not only, you must clearly demonstrate, the same things that you do, for a personal loan, you must also demonstrate, the property is viable, from a financial point of view, and the rents, will drive the cash flow . It is important to have several reserves, which include: a) repairs; b) renewals; c) updates; unforeseen contingencies, etc.
2. Property financial problems: I believe in the 6% rule, which means that the net return should be 6%. For example, one factor is cash flow, while the other is the overall rate of return or return on investment / ROI. So, if you buy a $ 500,000 property, put down a $ 125,000 down payment and have a $ 375,000 home loan and the rate is 5%, your principal and interest, on a 30-year fixed rate vehicle, will be approximately $ 2,000 per month. If your real estate taxes and other escrow items, including insurance, etc., are, for example, $ 12,000 per year or $ 1,000 per month, your total out-of-pocket, each month, is approximately , $ 3,000. If you estimate, updates, repairs, etc., is another $ 12,000 per year ($ 1,000 / month), you should use this figure of $ 4,000 per month, for your preliminary calculations. Also, base your income on having each unit, unoccupied / unoccupied, 2 months out of the year, to proceed conservatively. This means that you must charge a total rental list for all units of at least $ 4,250 per month. Also, you should make sure, your net income should generate approximately $ 32,000 per year.
3. Deal with maintenance issues: Are you comfortable with these challenges and responsibilities?
Four. Dealing with tenants: Are you ready, willing, and able to deal with tenants and collect rents, enforce leases, meet a tenant’s needs, and the personality issues involved?
5. Opportunity costs: How does owning these properties (remember to factor in appreciation, depreciation, profits, and net income) compare to what you could do with other investment vehicles?
Is owning a rental property right for you? Consider the benefits and pitfalls and proceed wisely.