Investment Properties - Considerations before starting

Abraham Fu By Abraham Fu, 1st Mar 2015 | Follow this author | RSS Feed | Short URL http://nut.bz/3pe0n0wj/
Posted in Wikinut>Money>Property

Considerations for investment properties including REITs, Experts, and Rule of Thumbs

Investment Properties

There are many books and articles that tout the advantages of owning investment properties. On paper it can seem like a great idea, (and it can be in actuality - as long as the numbers work out) but having gone through the process, there are some considerations that need to be kept in mind.

Rule of Thumb

My own:
Property price should be no more than 100x the monthly rent (i.e. if you can rent the house for $1,000 a month, you should find a house that is less than $100k).

When working the numbers, assume that 50% of the rent goes to expenses (all the fees and vacancies we will talk about below).

Assume that the property will be vacant 10% of the time (about a month out of the year)

Considerations

Found a house or condo that meets all the conditions above? Great! Now there are many items that need to be considered when you are looking at an investment property. I've listed some below but a full explanation of each of these can be found in this article:

Maintenance Costs-
As the landlord, you are responsible for pretty much everything. If you bought a condo, then this means everything inside plus the patio. This means anything that goes wrong with the electrical, plumbing, HVAC, structure, water, etc. is your responsibility. If you bought a house to rent, then you are also responsible for the property being up to code, keeping the grounds safe, and ensuring landscaping is done (this can be the tenant’s responsibility).

Turnover maintenance-
Turnover can include fixing things from normal wear and tear, repainting, cleaning the entire property, re-keying the property (just to be safe), and transferring utilities to your name.

Advertising or Property Management Costs -
Property Managers will usually take anywhere from half to an entire month’s worth of rent for advertising and listing fees, then take anywhere from 5%-12% monthly for property management fees.

Vacancies -
This is huge as you are losing money every month the property sits vacant
Taxes and Insurance

Other considerations:

Down payment and interest
Income Tax
Closing costs and legal fees
HOA Fees

What about a REIT?

If all of those considerations is causing a headache already, many people then ask, is a REIT a good alternative? Short answer is that it's a completely different animal. While REITs hold property, they have different tax considerations and don't give you nearly the same cash flow.

Hire Experts

A solution to the consideration headaches is to hire experts. You may like to do a lot of thing yourself, but at some point it is more efficient and effective to hire an expert.

Some experts to consider:
Real Estate Agent
Home Inspector
Real Estate Lawyer
Property Manager
Accountant
Handyman

If you really want full management -
Turnkey Companies - There are companies that will even be able to buy foreclosures, renovate it, and rent it. All you would need to do is hire them and put up the initial money.

Conclusion

Investment properties can be a great way to invest and generate cash flow. As long as you treat this like a business and care for all the areas that can trip this business up, it can be a profitable business.

Tags

Investment Properties, Rental Property, Rule Of Thumb

Meet the author

author avatar Abraham Fu
I’m a Duke grad and a CFA charterholder (Chartered Financial Analyst). When I’m not working I like to poke around and see how I can keep more of my money, grow it faster and reduce the

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