Every successful investor knows what the numbers are before purchasing an investment property. You might say to yourself, “that is easy, does the rental on the property pay for the mortgage?” That is a good start, but there are so many other numbers that you need to know about. That is where an experienced Realtor can help you find out what ALL the numbers are and if you can make a profit.
When you buy an investment property, most first time investors think that once they have purchased the property there are never any more costs. So let me go through with you some other things you need to consider before putting an offer in on an investment property. Is this a multi-plex unit or a single family home? If this is a single family home you need to look at the appreciation over time. Is the property in a neighborhood of mostly owner occupied homes? More owner occupied homes in an area mean higher resale value and more community involvement.
Does the property come with long term renters or is it vacant? This can either add value to a property or decrease the value. An owner of an investment can say they charge $800 a month in rent a month, but if it is vacant they might as well charge $0. No renters means no money. If the investment property is vacant you need to consider the cost to fill it, such as newspaper ads, signs, internet, flyers, and so on. Also, if it is rented you need to consider these same costs if someone should move out. Plus if you have a tenant move out you need to consider that you will have the cost of at least one month without rental income, and also carpet replacement, painting, etc. These are all things that need to be considered when planning your budget on an investment property.
Another way to save on costs is to manage the property yourself. If you plan to do this, make sure you get a property within 10 miles. You don’t want to spend all day driving to units clear across town; Remember time is money! Management costs vary, so if you are planning to use a management company shop around and get references.
Who pays for the everyday maintenance and utilities? These can add up to thousands per year in incremental costs. Who waters and mows the lawn? Who pays the water, electric, sewage, garbage etc? These are all things you need to ask before you purchase a property. There are also the maintenance costs that will have to be covered by you like a new roof or a failing exterior of a property.
Now for the nasty word that everyone hates to hear…TAXES! This is a number that changes every year. It isn’t a fixed cost like a mortgage payment. So if you run the numbers and they look good, will the taxes going up next year and you not giving a rent increase change your mind on this property? It is a good idea to talk to your tax professional before deciding. Remember even if you buy a property that has a zero cash flow in every month, it will still give you tax benefits that at the end of the year will put money in your pocket.
So if you decide to get into investment property to increase your net worth, sit down with a Realtor and run the numbers with him/her and find out what type of property will best suit your needs immediately and in the future.
Todd Clark – broker
Kastings & Associates