1. Personal financials: Do you have the necessary funds, and will you qualify, for whatever financing, might be required? Obtaining a mortgage on a non – owner – occupied property, is significantly different from the process, regarding, one for a personal home. In most cases, a larger down – payment is required (often 25% – down, instead of 20%). In addition, the requirements differ, because not only, must you clearly demonstrate, the same things, you do, for a personal loan, you must also demonstrate, the property is viable, from a financial standpoint, and the rents, will handle the cash flow. It’s important, to have, several reserves, including: a) repairs; b) renovations; c) upgrades; unanticipated contingencies, etc.
2. Property financial issues: I am a believer in the 6% – rule, which means, the net return, should be 6%. For example, one factor is the cash flow, while the other is the overall rate of return, or return – on – investment/ ROI. Therefore, if you purchase a $500,000 property, put $125, 000 down, and have a $375, 000 mortgage loan, and the rate is 5%, your principal and interest, on a 30 – year, fixed – rate vehicle, will be approximately $2,000 per month. If the real estate taxes, and other escrow items, including insurance, etc, are, for example, $12, 000 per year, or $1, 000 per month, your total, out – of – pocket, each month, is approximately, $3, 000. If you estimate, upgrades, repairs, etc, are another $12, 000 per year ($1, 000/ month), you should use this $4, 000 per month, figure, for your preliminary calculations. In addition, base you revenues, on having each unit, unoccupied/ vacant, 2 months per year, to proceed conservatively. This means, you should collect a rent – roll, total, from all units, of at least, $4250 per month. In addition, you should be ensured, your net income, must generate approximately $32,000 per year.
3. Dealing with maintenance issues: Are you comfortable with these challenges and responsibilities?
4. Dealing with tenants: Are you ready, willing and able, to deal with tenants, and collect rents, enforce leases, meet the needs of a tenant, and the personality issues, involved?
5. Opportunity costs: How does the owning of these properties (remember to factor in appreciation, depreciation – benefits, and net income, compare with how, you might do, with other investment vehicles?
Is owning rental properties, suitable for you? Consider the advantages and obstacles, and proceed wisely.