UPCLOSE & PERSONAL
WEEKEND INVESTOR
Knowing Profitable WhenYou See It HERE ARE NINE NUMBERS TO HELP IDENTIFY A SUCCESSFUL RENTAL INVESTMENT.
by Kevin Guz
hat constitutes a good, profitable rental property? There’s no one, single answer to that question. No matter how many people you ask or how many calculations you run, you’re probably going to get that many different answers. I remember when I was starting out as a weekend or part-time investor, I constantly faced that question. Many times, I had found a house that I liked, in a neighbor- hood that I liked, at a price point that I liked, and I was highly confident that I could rent that property. But there always remained the question, “Is it going to be a profitable rental property investment?” I have to admit that as a part-time or new investor, I was very overwhelmed. All the different measures and criteria and hurdles that I encountered or was told about by other investors made things very unclear, very inconsistent and very over- whelming for me. W Speaking from my experience even as a tenured investor, I often question whether I am using the right measures, whether I have calculated them accurately and whether I am interpreting them correctly to ensure that the property I am buying is going to give me the best possible return compared to other investment opportuni- ties that are out there. The question you’re probably asking IS IT A PROFITABLE RENTAL PROPERTY?
yourself first and foremost—“Is it a good rental property investment?”—translates to this: “Is it going to generate a decent, positive, monthly cash flow?” You’re probably also saying, “Well, gosh, how do I even know? Is there a little crystal ball that can tell me? What calculations and measures should I use so it doesn’t seem so speculative or risky?” And you may also be asking yourself, “Isn’t there just one simple measure that we all can use to calculate and interpret the same way that will clearly indicate whether or not it is a profitable rental real estate investment?” These are all great questions that I’ve asked myself in the past—and sometimes still do, even as a tenured full-time investor. So let’s try to simplify and clarify how you as a new investor can be highly confident that a property—whether it is a single-fam- ily home, condominium or townhouse—is going to be a good investment.
or number of years for which you’re going to borrow that money and you’ll get your monthly principal payment.
paying in taxes for that property. You can get those figures off county records, which are free and usually accessible online. NO. 5 HAZARD INSURANCE Another number you’ll want to know is the monthly hazard insurance payment you’re going to have to make to protect that asset from damage due to wind, hail, fire, water, etc. NO. 6 ESTIMATED REPAIR COST And you’ll want to estimate how much you’re going to spend on repairs, on a monthly or annual basis. There are some general assumptions you can make since you may not know what’s going to go wrong—how many times the toilet is
going to leak or the roof might leak or a window might break or the air conditioner might go out, among other things. A good assumption is 5 percent of your rent to be set aside to go to repairs. NO. 7 HOMEOWNERS ASSOCIATION DUES You’ll want to know if there are any HOA payments due on that property and what those are on an annual basis. You can get that off the MLS listing, for instance. NO. 8 PROPERTY MANAGEMENT FEE Number eight: Is there any property management fee you will need to pay? If you manage the property yourself, there is
You can determine that in a number of different ways. MLS comps and various online sources can tell you what properties are renting for in your specific market, based on the number of bedrooms and bathrooms, square footage and other typi- cal indicators or measures. NO. 2 MONTHLY LOAN PAYMENT Second, you want to know what the monthly principal payment will be on the loan you’re going to take out to purchase that property. You can calculate that based on the loan amount and the price of the house. There are Excel spreadsheets available for free all over the Internet, in which you simply type in the amount of money you intend to borrow, the interest rate you’ll believe you’ll get, and the term
NO. 3 MONTHLY INTEREST PAYMENT
Third, you want to know the monthly interest payment, which you can calcu- late by using that same tool. That loan amortization tool will tell you that if you’re borrowing this amount of money for this many years with this much interest, here is what you’re going to have to pay every month in interest in addition to that monthly principal.
NINE NUMBERS TO HELP DETERMINE A PROFITABLE RENTAL
There are nine numbers I always com- pile when I’m doing my due diligence to determine whether a potential real estate investment will be a good rental property or a good buy-and-hold investment.
NO. 4 PROPERTY TAXES You’ll want to know how much you’ll be
NO. 1 MONTHLY RENT First, I want to know the monthly rent.
58 | think realty magazine may :: june 2017
thinkrealty . com | 59
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