For some people owning and operating, renting, real estate is a great idea, while for others this might not be the case! The difference applies not only to the specific property, but also to the personality, attitude, and personal and specific strengths and weaknesses of each individual. Some factors include, of course, financial ones, including the necessary reserves needed to purchase a property, starting with the down payment, closing costs, reserves for repairs, upgrades, renovations, and contingencies. Also, some people are better suited to owning 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 consider, review and briefly discuss some of the key factors and considerations that one should fully explore in depth before taking the jump.
one. Personal Finance: Do you have the necessary funds and will you qualify for any financing that may be required? Obtaining a mortgage on non-owner-occupied property is significantly different from the process when it comes to personal housing. In most cases, a larger down payment is required (often 25% down, instead of 20%). Also, the requirements differ, because not only do you have to clearly show, the same things you do, for a personal loan, you also have to show that the property is viable, from a financial standpoint, and the rents will drive Cash Flow. It is important to have several reserves, including: a) repairs; b) renewals; c) updates; unforeseen etc
2. Financial problems of the property: I believe in the 6% rule, which means 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 $125,000, 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 about $2,000 per month. If real estate taxes and other escrow items, including insurance, etc., are, say, $12,000 per year or $1,000 per month, your total out-of-pocket, each month, is about $3 ,000. If you estimate upgrades, repairs, etc. to be another $12,000 per year ($1,000/month), you should use this $4,000 per month figure for your preliminary calculations. Also, base your income on having each unit vacant/vacant 2 months out of the year to proceed conservatively. This means you must collect rent – roll, total, from all units, of at least $4,250 per month. Also, you need to be sure that your net income should be generating approximately $32,000 per year.
3. Dealing 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 rent, enforce lease agreements, meet a tenant’s needs, and the personality issues involved?
5. Opportunity costs: How does owning these properties (remember to factor in appreciation, depreciation, profit, and net income) compare to other investment vehicles?
Is Owning Rental Property Right For You? Consider the advantages and the obstacles, and proceed wisely.
