Oxstones Investment Club™The real estate market has been rebounding in recent years, and investors are eyeing it again, though with some caution. Is buying real estate for rentals a good idea in 2014? How do you know? Here are some questions and calculations to consider in your decision.
The basic points to consider with a rental property are how much rental income you can get from it, against how much it will cost you. The costs include standard annual expenses like mortgage payments, insurance, property taxes, and standard maintenance of the place. You may also face some occasional expenses, like repairs (whether due to the tenant’s actions, or just equipment wearing out), advertising costs to fill a vacancy, and legal fees if you need to go through a foreclosure.
Here’s an example:
You find a condo that you can buy for $55,000. You are able to purchase it with cash, so have no mortgage payments or interest expenses.
- Income – On the income side, you look into what similar properties are renting for, and estimate that you will be able to rent it for $750/month, which is $9,000 over the year.
- Expenses – Itemizing your expected expenses, here’s what you find.
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- – Insurance is about $300/year.
- – Property taxes would be about $1,000/year.
- – Estimated costs for routine maintenance and repairs are $300/year.
- – You plan for one month vacancy each year, with a cost of $750 (missed rent).
- – You plan on $250/year for advertising to fill that one vacancy.
- – You figure that you might have a bad tenant every five years, who damaged the property and required legal eviction. $5,000 per occurrence would be $1,000 per year.
These expenses add up to $3,600 each year, which would be $300/month.
- Evaluation – Each year you could now plan to receive $9,000 rent minus $3,600 expenses, which is $5,400 overall. Compared to your initial investment of $55,000 to buy the property, this is a 9.8% rate of return. This makes the property a potentially attractive investment.
- As long as housing prices are going up, you also gain on the appreciation of your property. If the value of your real estate goes up by 3% during the year, it would now be worth $56,650, and you would have an additional $1,650 gain on paper, making this an even better deal.
- Considering financing. If you have to finance the purchase of the property instead of paying cash, they you will have additional costs. For the above example, say that you put down 30% of the purchase price ($16,500 down payment), and finance the rest of it with a 30-year fixed loan at 7%. Using these figures, your monthly mortgage payments would be $256/month.
- You would need to add this $256/month to your estimated expenses from above ($300/month), giving you your total monthly costs of $556. If you can rent the property for $750/month as anticipated, you would still have an estimated positive cash flow of $194/month. This would still make it attractive as an investment.
Find a partner with experience
Look for a partner with experience if you’re a first-time investor. Find a real estate agent with expertise in investment property deals, and ask him to help you out. He certainly know promising locations and properties worth considering. Relational brokers should also be considered because they have connections and they can make sensible recommendations, too. Another great tip is to collaborate with other expert realtors and close deals together. The economy is still shaky, so investors are now more willing than ever to partner up.
Search for the best location
If you want to invest in real estate with the goal of renting it out, finding a nice location is key. It’s important to buy homes in populated areas. Search for properties with multiple baths and bedrooms, and make sure the crime rate in that area is as low as possible. Tenants want to feel safe, so this is an important aspect you have to consider.
Can rental property be a good investment decisions this 2014? Yes, it can. The key to making money with real estate is to assess the market first. Look for homes located in populated areas, ask for help from experts, and you have good chances to make profit.
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