Run The Numbers Before Buying An Investment Property
Keywords: real estate, investment, cashflow, real estate calculator, austin real estate
People talk about running the numbers before buying an investment property, but before doing that we need to discover what are the numbers and how do you get accurate numbers. Running the wrong numbers can make the difference of making $500 or losing $1000 per month. In this article we will go through the costs and factors to consider to make your investments successful.
RENTAL INCOME
Rental income is not as straight-forward as it seems. Sometimes properties are under-rented and sometimes properties are over-rented, so be sure to find out the market rents when you consider a property. When we bought our first fourplex, we looked at comparable leases and realized our rents were too high, so instead of assuming we would continue to receive $3600 of rental income, we had to be realistic and assume it was more like $3200.
MORTGAGE INTEREST
A huge cost is mortgage interest. You should definitely sort out the details of your loan options and get an idea of current rates before running the numbers. It could make or break a deal. If you are getting a duplex or a house, the loans are generally similar to other home loan programs. Triplexes and fourplexes tend to have higher rates, and commercial is a whole other ballgame. One thing to consider is to put more down because the more you put down, the less your loan will be, which means less monthly interest to pay. Another consideration is the type of loan. We usually recommend for people to get a fixed rate mortgage these days because the current ARM (adjustable rate mortgage) rates are not all that much lower than fixed rates.
Basically, just get educated about the loan options and run the numbers with them. Oh, and also, do not just take advice from one mortgage person. The best way to get educated is to talk to a variety of mortgage brokers and banks to find your best solution; not all loan places have the same programs.
TAXES
People frequently use the taxes from the year when they purchased the property, assuming the taxes will stay the same. Taxes change every year. Taxes can go up drastically after a purchase. For example, an owner occupied property usually has tax breaks, so unless you intend to owner occupy too, your taxes will go up.
Also, the county appraisal that your taxes are based on could go up after your purchase. For example, if you buy a property for 100,000 but the tax appraisal last year was for 50,000, don’t count on it remaining at 50,000. In fact, I have seen cases where a year after a property was purchased the tax assessor increased the appraisal value to the purchase price. The safest approach is to look at the tax rate and the purchase price to determine your future taxes.
VACANCY COST
For some reason people tend to forget to take into account vacancy rate. Even when looking to invest in a desirable rental area, it’s best to always take into account at least an 8-10% vacancy rate. Do some investigation, look at your market and find statistics on the average vacancy rate.
TENANT TURNOVER COST
We have personally found the biggest surprise to be the expense of tenant turnover. This includes advertising for a new tenant, cleaning, repainting, replacing carpet, etc. If you expect to have high tenant turnover, like next to a college campus, anticipate this to be a significant cost.
INSURANCE COST
Insurance on investment properties are typically higher than owner occupied, single family properties. So get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. You also should purchase liability insurance which can be expensive.
MAINTENANCE COSTS
This is by far the most difficult number to estimate. It depends on the property, whether you fix some of the problems yourself or hire outside help, and random luck. So we can’t give you a hard and fast number but we can look into different factors to take into account.
**Property Type - When you evaluate different properties remember to take into account the type of property. If it’s brick you won’t have to paint or worry about wood root. Decks need constant maintenance. A property with wood or concrete floors will be easier to clean and will not have to be replaced when a tenant moves out. Just think about the aspects of the property and their maintenance costs.
**Property Size - A smaller property is easier to maintain than a larger property. For instance, say there are two properties for sale for 200,000 and each have a combined rent of 2000. A property with 2 units and a total of 1000 square feet will be cheaper to maintain than a property with 6 units and 3000 square feet. The larger property will be more expensive to maintain when you are replacing the larger roof, painting the interior walls, etc. Also, more units mean more money spent on advertising, make-readies, and more appliances to repair.
**Property Location - Consider your proximity to the property. If you buy a property 30 miles away, over the course of a year you can spend a decent amount of gas money driving back and forth.
**Your personal management style - How often will you do maintenance work yourself vs hiring help? For instance, when a unit needs painting will you paint the rooms or hire a painter? Hiring professionals is definitely more expensive, but you have to be realistic about how much you will personally do, especially if you are looking at a lot of units.
UTILITY COSTS
Be sure to check what the tenants pay for and what the owner pays for. This includes all the utilities and lawn maintenance. In addition, there may be owner expenses like parking lot lights and trash bin service.
PROPERTY MANAGEMENT COSTS
If you are going to hire a property management company, definitely get their rates. We personally choose properties that we can manage ourselves.
SUMMING THE NUMBERS
Once you add all the numbers up, you often find the property has 0 cash flow or even negative cash flow. This doesn’t necessarily mean you should not purchase the property. There are positive tax benefits to rental properties and depending on your situation, a property with technically 0 cash flow could still put more money in your pocket due to tax benefits. Also, if you think the property is going to appreciate in the future, a zero or negative cash flow property could still be appealing.
The point here is that if you are buying a property with zero or negative cash flow, it’s best to know beforehand instead of after the property has been purchased.
Located in Austin Texas www.escapesomewhere.com Escapeso Austin Real Estate offers potential investors with advice and expertise about the Austin Real Estate market. Their website offers a free Home Search of the Austin MLS along with description of the different downtown Austin Condos.
Previous Articles Highlighter:
How School Loan Consolidation Can Save You Money (1)
Eventually, you might find you want a school loan consolidation. All students who are bound for college have different needs. Because of this, you must investigate all of your options.
Saving Money Through Student Loan Consolidation (2)
If you are like most students who want to avoid the interest of several different loans, consolidating your loans makes a great deal of sense. It will allow you to save money over the long haul and will simplify the payment process when it comes time to repay your lenders.
Discover Newly Launched Hedge Funds And Those Who Gained On Exit (3)
Amanda also manages five private equity hedge funds of funds, which have several domestic and international investors. Amanda Group currently has more than EUR 1.3 billion ($1.7 billion) in assets under management and they have made investments in more than 100 private equity funds in Europe, the United States, Asia and Russia.
Selling Your Own Home (4)
Now is a good time to compare your house with others on the market in the same area. TIP # 6 When you are ready to sell your home it's always a good idea to have the carpets cleaned.
Student Consolidation - Making Your Loan Manageable (5)
When you consolidate student loans, you have to find a company that deals with loan consolidation. Several national companies specialize in this, and are willing to help you make your loan payments easier.
The Good, The Bad, And The Private Student Loan (6)
Students who are uninformed about the type of student loans available end up making a poor decision that costs them more money in the end. Make your time in college - and your time after college - easier by finding the right loan or loans for you.
Is A Home Equity Loan Right For Your Home Improvement Plans? (7)
Overall, however, one variety or another of home equity loan is your best bet for when you want to pay for home improvement. The rates are typically significantly lower than what a credit card would charge you.
Getting Out Of Debt (8)
If none of these are an option then the inevitable court proceedings will begin, Bankruptcy and Individual Voluntary Agreements (IVAs) are the two usual methods of satisfying the courts. Bankruptcy or an IVA will always be a last resort, being honest and upfront about your debts and financial position in the first place can reduce the risk of anyone ever reaching this level of proceedings.
Should Refinancing Your Mortgage Be In Your Future? (9)
You had your mortgage, and you may have gotten a larger house because you were able to get an adjustable rate mortgage. Here are some reasons, though, why you may want to think about refinancing that mortgage.
5 Ways To Obtain A Higher Credit Card Limit (10)
A bad credit report can have many other negative consequences, so you will want to take action to correct the problem as soon as possible. If necessary, consult a credit-repair expert to see how you can resolve the situation in the shortest time possible.
Earnings Matter: S&P And Stock Market Investing (11)
Hence, game over. Come back next year. But wait! Let's examine each of the above assumptions. Was the S&P fairly valued at the beginning of 2007?
Filing Your Flood Damage Insurance Claim (12)
Computers, television sets, clothing, expensive electronic equipment, books, and etcetera should be listed here. List anything of value that could have been water damaged or lost. If you can return home, you should separate the damaged items from the undamaged items and take pictures of your property to give the adjuster a good idea of the kind of loss you have endured.
What Is A Mortgage Refinancing Home Equity Loan? (13)
Since you are getting money through refinance that you would ordinarily be spending on your loan repayments, it makes a lot of sense to invest that money back in you property in order to raise its overall value.
How Do I Get A Business Loan? A Business Plan Is The First Step (14)
As long as all the required information is included it can be 10 to 15 pages in addition to the financial statements. The business plan also includes the historical financials for the last three years and projected profit and loss statements, balance sheet and cash flow projections for the next three years.
No Need For Concern With Bad Credit Student Loans (15)
If you spend some time with your school's financial aid advisor, you should know all you need to know about bad credit student loans. Do not let bad credit ruin your chance to go as far as you want!
Consolidate Loan Payments For College (16)
The last thing you need is more mental baggage, especially financial in nature. Choosing to consolidate loan payments will make your student loan debt payments easier. You may even end up saving a good deal of money.
Dental Insurance Coverage - What Do You Really Need? (17)
The premiums may well be reduced for those that use the dentists on the list provided by the insurance company. So, all in all it's really important to check out the small print (or find a dental insurance company that only has easy to understand terms), so that you understand exactly what you are getting in the dental insurance coverage you are buying.
Greed And Fear: What Does It Take To Get Rid Of It? (18)
After all, it's stocks we're trading, not playing sports where our bodies are physically working to exert energy and sweat. So why then does it take to so much emotion just to click a buy button and a sell button and watch the screen with numbers moving back and forth?
What Is Home Owner Insurance And Why Do You Need It? (19)
If your current insurance company does not offer such discounts, you may want to consider shopping around for an insurance company that does. Insurance Policy Coverage's It is possible to own a home without having home owner insurance coverage if you do not have a mortgage, but many people see this as too big of a risk.
Is A Debt Consolidation Loan For You? (20)
A consolidation loan is a loan that you can use to pay off all your debts, by using the loan to pay your debts you effectively 'transfer' your debt to the one company, the consolidation loan lender.
Newer Articles Highlighter:
The Foreign Exchange Market (FOREX) Uncovered (1)
Additionally, it is not necessary that physically have the currency in hand that you choose to buy and sell. The quickest and by far easiest way to get started is to find a Forex market site, open an account, deposit your money, and then just start trading.
Forex Broker - Choosing The Right Forex Broker (2)
These free accounts are just practice accounts and don't deal in actual real money. They are a good way to get to know what it's like to trade on the forex market and it's recommended that you try one of these accounts before you move onto the real thing.
What Are The Benefits In Obtaining Debt Consolidation Services? (3)
This can be quite a handful to manage especially if you have a day job to attend to. It is also not unlikely that you would forget paying on time because of other priorities.
Asset Based Lending As A Financial Tool (4)
Tends to feature fewer covenants than other types of financing and those it does include tend to be more flexible. Cash flow loans, by contrast, often have four or five covenants including total leverage, fixed charge coverage, and minimum net worth.
Andorra Tax Haven Introduces Capital Gains Tax (5)
As well as the local market, Andorra property sells to second home buyers and international buyers wanting residency. With property prices a quarter of rival tax haven Monaco, demand has increased from international buyers.
Andorra Property Prices Hit 2007 Ice (6)
Buying a property in Andorra is often seen as a route to residency, which entitles people to live in Andorra and benefit from her tax haven status. To obtain residency in Andorra, applications need to be submitted in Catalan.
Tax Haven Property 2007 Gets An Icy Chill (7)
One of the drawbacks for those looking to become a resident in a tax haven when considering Andorra has been that the country has no airport of its own, and is unlikely to have ine future given that it is located in the Pyrenees.
Monaco Real Estate Prices To Overtake London Again? (8)
With the good weather in Monaco expect to see plenty of solar panels on the roofs to make the buildings energy efficient'. It is possible that the new island will be incorporated into future Monaco Grand Prix, which could give more overtaking opportunities.
Taxes You Must Consider Before Passing On Your Properties To Your Heirs (9)
The rate at which estate tax is levied is currently a flat 45%. Looking in to the historical background you will find that pursuant to relevant legislative enactment in the year 2001, there has been a gradual lowering of the highest rates of estate tax which were between 37 to 55 percent earlier.
A Tax Guide To Manage Your Estate Taxes Effectively (10)
Marital deduction allows you to transfer unlimited assets to your spouse without any tax implications to your estate. This leaves you free to move up to $1million to your grandchildren or to others through gifts without paying gift tax.
How Can Gifts Help You Reduce Your Estate Taxes? (11)
This is known as Annual Exclusion. The lifetime exclusion limit for each taxpayer is $1million. Therefore, any number of $12000 gifts would remain non-taxable even if made in one calendar year but to different persons.
Tips To Curtail Your Estate Taxes (12)
However, the exemption of $2 million is wasted. On the death of the surviving spouse, the entire estate is taxed, allowing an exemption of just the $2million attributable to the last dying spouse.
What Are The Current Tax Rules You Must Consider For Your Estate Planning? (13)
Medical expenses that are not covered under insurance can also be paid without attracting any tax. Forming trusts has already been mentioned above and includes life insurance trusts, charitable trusts, living trusts, revocable trusts, personal resident trusts, credit maximizing trusts etc.
The Second Mortgage Home Equity Loan (14)
The interest paid on a second mortgage, up to the first $100,000 borrowed, is tax deductible provided that the loan is on your primary residence. It should be noted that interest rates on home equity loans are generally higher than a first mortgage, usually in the 2-4% higher range.
Financial Security In An Unstable Economy (15)
Change your attitude about money. Change your financial habits. Read financial magazines, the business section of the paper, and financial magazines. Know what money can do for you.
Medical Equipment Acquisition And Leasing (16)
Your current cash position and monthly cash flow d. Your current and projected future tax position e. Financing incentives offered by the vendor f. Careful evaluation of the lease or financing contract to ensure that it meets the requirements for the method you plan to use to report the equipment in your tax filings g.
The Many Faces Of Student Loans (17)
You have a number of options, so taking the time to research all of them will benefit you. Your collegiate financial advisor will provide you with a great deal of advice and direction.
Are Balance Transfer Credit Cards On The Way Out? (18)
Far from being on the way out, there are more balance transfer credit cards on offer than there have been for years. Granted, those offers have changed. The current crop include conditions that guarantee the issuing bank some benefit for taking on a transferred balance from another company.
A Simple Way To Cut Your Monthly Expenses (19)
Look for a cheaper monthly plan. Many of the cheaper services offer awesome service at a much lower monthly rate. Shop around and see if you can lower your costs.
Why Is Estate Tax Planning So Important? (20)
b) Avoiding probate:- You can avoid you heirs going through harrowing probate proceedings, which are also very costly and can consume a big part of your estate in legal costs and fees.
Permalink to Run The Numbers Before Buying An Investment Property