Becoming a landlord isn’t always easy and it may be scary to some, but if you are willing to take that step of investing into real estate you can still count on income for years to come. The key is choosing the property wisely. Look for positive cash flow every month, or as I like to say “cash flow is king.” There are a few formulas to look at when buying rental property to make sure your investment is a profitable one. One formula is to review your monthly net profit after all expenses.
Most investors will tell you that a rental property is a good investment if you net anywhere from $250 to $500 per month after all of your expenses. Expenses include your mortgage payment (PITI) principle, interest, taxes, and insurance, your management fee (typically 8% to 10% of monthly rent) if using a property manager, and any money you choose to place into a reserve fund (usually equal to about three to six months’ of expenses for vacancies, repairs, and maintenance.)
Check out this scenario as an example:
$1,800 – Rental Payment
($900) – Monthly Expenses
= $900 – Net Profit per month (A great cash flowing investment!)
Now there are several ways to run your numbers. First, you can look at the purchase price plus the cost of repairs. Have a contractor walk through the property and get an idea of how much you’ll need to put into the house. Once you have a rough number, you’ll know your total cost to acquire the property and get it rentable. If you plan on refinancing the property after completion, then having this number will help you determine what your total monthly mortgage payment will be.
To gauge your monthly cost, you can call different lenders or even use an online PITI (principal, interest, taxes & insurance) calculator. Determining rent can be tricky but often times a local property management company can get you this number. There’s also a website called www.rentometer.com that can be used to get a feel for market rents in an area. Once you locate a property and run your numbers then all you have to do is use cash, retirement funds and/or a loan to acquire and complete the repairs on the property. The sooner you get started, the sooner you can begin watching your rental income flow in! Happy investing!
Matthew A. Tillack
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