For many people, getting a rental property can be a great investment. The question you have to ask before buying rental property is: Are rental properties a smart investment for you? In order to answer that question, you’ll need to figure out the estimated cash flow of the property. Generally speaking, you can determine cash flow by taking all your rents received, and then subtracting out your mortgage payments, taxes, maintenance, and other utilities.
When it comes time to start running the numbers, keep in mind you can get a lot of this information fairly easily. For example, you can use a mortgage interest calculator to figure out your mortgage payment. You can also usually figure out your taxes by contacting your local county land office or local assessor. For utilities, you can sometimes go to the utility’s website and estimate based on usage and square footage. As for maintenance, you’ll have to negotiate those costs, but it’s usually safe to estimate a few hundred dollars a month.
Mortgages Just For Rentals
Getting a mortgage for a rental property is usually the hardest part of the process. Since it is considered an investment, many lenders require borrowers to jump through a lot of hoops.
Many lenders require borrowers to get a “buy to let” mortgage, which uses lease agreement incomes and other factors to decide on borrower qualifications. Since these loans are different than traditional loans, you may want to use a buy-to-let mortgage calculator to determine your costs for this loan. Since the loan is higher risk, you may notice your costs increase.
Is a Rental Right For You?
It is important before buying rental property to remember that a rental property is more than just a regular investment; it’s more like a business. As a landlord, you’ll need to focus on income and costs. However, you will also have to deal with other concerns such as tenants and maintenance.
There will always be other unforeseen factors beyond just the fundamentals of cash flow, so make sure you try and take everything into consideration before taking the plunge on a rental property.
Photo Credit: turkeychik
Nice summary of the concerns for getting into rentals. We have rental property and it’s a lot of work.
One thing to consider in your cash flow analysis is whether you are going to manage the property yourself or pay a property manager. We use a property management company for our out of town rental, and they charge 10%. But having someone else to show the property during vacancies, collect the rent and be on hand to respond to emergencies is worth it to us for a property that’s a couple of hours away.
Good advice, Emily.
We currently have a duplex and love that the tenants rent covers our mortgage. Over the past few years we have been saving for our next investment property . I created a handy little spreadsheet where I can plug in the numbers and estimates for rents received and expenses to get an idea about the possible cash flow. Financing I agree is a difficult step but we will cross that bridge once we find a property that fits our criteria.
I like owning property, but am not crazy about being a landlord. We haven’t had any tenant problems yet, but it is a concern as the laws seem pretty skewed towards tenants rights these days (here) due to a justified backlash against predatory landlords some years ago. Anyway, our rental isn’t as close as a duplex, but it is right across the road from us. Planning on also buying the neighbors place in a few years. We have first option and will decide then.
As an investment it has been fantastic due to the increase in property values the past 10 years. And we pass on our good fortune in reduced rent. Last week the tenants grandmother stopped by and thanked us for not being greedy and giving the kids a break so they can get started. I have always believed in reaping what you sow and so far it has worked out just fine for everyone. I do all maintenance and upkeep due to having a trades background, but If I had to pay for upkeep and repairs the costs would have to be passed on to the renter.
I would NOT own property as an investment unless I lived close by and could keep an eye on things. Too much can go wrong in an absentee situation. We totally respect their privacy and I don’t even look down the driveway on my walks when they are home, but once per week I cut the grass and you can appraise the situation from a lawn tractor just fine.
Last week they baked us some scones. Nuff said.