Economic Considerations of Buying Smaller Investment Properties
While most larger real estate developers consider return on investment, or KINGBefore committing to a specific project, in many cases, those who buy smaller investment properties often seem to fail to do so with the same degree of care and focus. For the purposes of this article, it will be understood by real estate, from 1 to 6 units, and for residential use. Many, instead of going through this process, look at these buildings and properties in a similar way that they perceive, purchasing their personal home! However, it’s important to realize, wise investors, recognize and understand, an economics mindset, return on investment, to determine if it’s a smart investment or not. Basically the same rules apply whether rentals are standalones, 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.
one. How much to spend for the property: A conservative approach, to consider the correct price, to spend, should be, considering the total price, in regards, to the net income, rolls. For example, an investment property, purchased for $500,000 must bring net income of at least 6% per year or $30,000. The net is derived, considering the total income, minus the 20% to contribute, a reserve for vacancies and turnover. Then reduce this by expenses, including fixed ones like taxes, mortgage interest, landlord-paid utilities, and a reserve for repairs, renovations, and improvements. So, if taxes on that property are, say, $8,000, and utilities are $500, and mortgage interest is another $6,000, and you save 1% per year for reserves ($5,000), so you must add $19,500, to the equation. Therefore, you will need a total rent, after deduction of 20%, of $49,500 per year (or just over $4,100 per month). So your 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.).
2. Cash Flow: Look for a positive cash flow, so when owning these types of properties, be as stress free as possible. Compare the combination of your mortgage payments (including interest and principal), plus real estate taxes and upkeep/repairs/renovations/upkeep costs, to see if you stay within the 80% rental limitations.
3. Competitive focus: What is the prevailing/typical rent charged in the specific area? Rather than focus on being at the high end of the market, the best approach is often to be in the mid-low range and look for less churn.
Four. Rotation: The best scenario is to meet the needs and projections of income, while controlling expenses. The lower the tenant turnover, the lower the owner’s costs.
Investing in real estate, when done carefully, is a tried and tested approach, one that makes sense and usually brings many benefits, including appreciation of the asset’s value. Will you be a wise real estate investor?