Posted by The Upfront Mortgage Broker in Florida
Crunch the numbers before buying Investment Property
Posted by The Upfront Mortgage Broker
- Everyone always says to run the numbers before buying an investment property, but what are the numbers and how do you get accurate numbers? If you run the wrong numbers it could make the difference of making $400 or losing $400 per month. I’ll go through the costs and factors to consider in making your investments successful.
- Mortgage Interest
A major expense is mortgage interest. You need to sort out the details of your loan options and get an idea of current rates before running the numbers. Basically, call me first because it could make or break the deal. If you are buying a single family home or a duplex, the loans are generally similar to other home loan programs. Three and four unit properties will have higher rates. A five unit (or more) property is classified as commercial and is unlike all other property types.
- 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.
In addition, the county appraisal that your taxes are based on could go up after your purchase. For example, if you buy a property for 150,000 but the taxed value last year was for 75,000, don’t count on it remaining at 75,000. The safest approach is to look at the tax rate and the purchase price to determine your future taxes.
- Rental Income
Rental income is not as clear 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.
- 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. Talk to Realtors and Property Managers.
- Utility Costs
Be sure to check what the tenants pay for and what the you as the owner will pay for. You should look at the utilities and lawn maintenance as well as lot lights and trash bin services.
- Tenant Turnover Cost
Tenant Turnover Cost includes advertising for a new tenant, cleaning, repainting, replacing carpet, etc. Pay attention to the area you are buying into, 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 is typically higher than owner occupied single family properties. Get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. Talk to your insurance agent first.
- 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 I can’t give you a hard and fast number but I can look into different factors that you should 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. 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. 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 quite a bit of gas money driving back and forth.
**Your personal management style – How often will you do maintenance work yourself vs. hiring help? 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 many units.
- Respectfully,
The Florida Upfront Mortgage Broker
Joe Bartolotta
Residential, Commercial & Reverse Mortgages
Direct 407.340.0220
Joe (at) the upfront mortgage broker (dot) com
6 Comments, Comment or Ping
Jeffrey
Just wanted to let you know that your blog has made it to our Best of the Web April 2008 Real Estate Resource List.
Here’s the excerpt from your listing:
Buying Foreclosure Property – The Flordia Upfront Mortgage Broker gives you great tips on buying a foreclosure property. What to expect and what to be wary of. A must read.
Along with a spot on our blog and good link juice from the article directories that we send this to, we made you a Web 2.0-style badge to accompany your placement.
It’s hard to do these things via comment boxes, so just email me for more info. Thanks! Excellent work!
Apr 8th, 2008
Ned Carey
Good post and congratulations for the Best of web thing in the comment above. Almost no one talks about turnover cost but it can easily eat a years profit.
I would also add Management expense. Efven if you manage it yourself you should figure in management expense. If you are doing the real work of managing your own properties shouldn’t you make EXTRA profit? If the only money you make on a propety is because you manage it yourself, why not just manage other peoples properties?
Apr 12th, 2008
Joe Bartolotta
Jeff,
Thanks for the comment and the inclusion on the Best of the Web.
Joe
Apr 14th, 2008
Neal
Joe & George,
Thanks for the post. I look forward to reading future articles by the both of you.
Jul 14th, 2008
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