While most larger, real estate developers, consider the Return on Investment, or ROI, before committing to a specific project, in many cases, those purchasing smaller, investment properties, often, seem, to fail, to do so, with the same degree of attention and focus. For the purposes of this article, this will refer to properties, with 1 – 6 units, and residential use. Many, instead of following this process, look at these buildings, and property, in a similar way, they perceive, buying their personal home! It is, however, important to realize, wise investors, recognize and understand, an economic, Return on Investment, mindset, to determine, whether it is a wise investment, or not. The same rules apply, basically, whether, the rentals, will be, stand – alone, 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, on any deal.
1. How much to spend for the property: A conservative approach, to considering, the right price, to spend, must be, considering the total price, as it relates, to the net, rent – rolls. For example, an investment property, purchased for $500,000 must generate a net income, of, at least 6%, per year, or $30,000. The net, is derived, by considering total rent rolls, minus 20% to provide, a reserve for vacancies and turnover. Then, reduce this by the expenses, including the fixed ones, such as taxes, mortgage interest, landlord – paid utilities, and a reserve for repairs, renovations and upgrades. Therefore, if taxes on that property are, for example, $8,000, and utilities, $500, and mortgage interest, another $6,000, and you put away, 1% a year, for reserves ($5,000), then, you must add, $19,500, to the equation. Therefore, you will need a total rent – roll, after the 20% deduction, of $49,500 per year (or slightly over $4,100 per month). Therefore, the total rent collected, each month, should be approximately $5,166 (because you’ll need to budget, based on approximately, $62,000, to create a safety – net, to protect against vacancies, etc).
2. Cash flow: Seek a positive cash flow, so, owning these types of properties, are, as stress – free, as possible. Compare the combination of your mortgage payments (including interest and principal), plus real estate taxes, and maintenance/ repairs/ renovations/ up – keep, costs, to whether you are staying within the 80% of rents, limitations.
3. Competitive approach: What is the prevailing/ typical rent charged, in the specific area? Rather than focusing on being on the high – end of the market, the better approach, often, is being in the middle, to bottom range, and seeking lesser turnover.
4. Turnover: The best scenario, is meeting revenue needs and projections, while controlling expenses. The lower the turnover of tenants, the lower a landlord’s costs.
Investing in real estate, when done carefully, is a tried, and proven, approach, which makes sense, and usually, provides many benefits, including appreciation of the value of the asset. Will you be a wise real estate investor?