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. It.s best to 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.
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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.
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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.
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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.
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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.
Run
The Numbers Before Buying an Investment Property