Todays post offers some residential real estate investing advice. Before purchasing any property you need to educate yourself about the real estate market you will be competing in. And you need to do your due diligence to understand what home rent for in the area and what fees and expenses will be. During your initial analysis you’re just trying to narrow down you investment options so its ok to guesstimate your numbers. But after you’ve whittled down your options and are ready to make a final decision you need to be extremely accurate on your projected rental price and property expenses.
When you’re evaluating properties its easy to get caught up in the monthly rental numbers, and you should to some degree. But equally important is to pay attention to the property and the long terms property appreciation opportunity. Also let's remember the 1% rule where any property that we invest in must be able to support a rent that is at least 1% of the purchase price.
So getting back to comparing our two residential real estate investment properties, here are the details. Property #1 costs $100,000 and you can rent it out for $1,300 per month. That means that your rent is 1.3% of our mortgage which exceeds the minimum accepted amount of 1% by 30%. Property #2 costs $200,000 and you can rent it our for $2,000 per month. That means your rental amount is 1% of the purchase price… the minimum amount you should consider.
Now lets project out into the future. Property #1 is located in a declining neighborhood. Over time housing prices will continue to drop or at a minimum remain level. In 10 years property #1 is expected to have decreased or at a minimum remained level and only be worth $100,000. Property #2 is in an area where home prices are appreciating. In 10 years the home is expected to increase in value to be worth approximately $250,000… an appreciation of $50,000.
So how do these two investments project out in earnings when looking at the short and long-term opportunities? (we’ve had to make some estimate based on insurance and tax rates in Georgia. But we’ve adjusted those based on the value of the two properties)
Property #1
Mortgage Rate: 3.85%
Price: $100,000
Down Payment: 25% ($25,000)
Loan Amount: $75,000
Monthly Cost: $840 (Mortgage, Property Tax, Insurance, Maintenance/Repairs, Property Management Fees,Vacancy)
Rent: $1,300
Monthly Net: $460
Yearly Net: $5,520
10 year cash rents: $55,200
Property #2
Mortgage Rate: 3.85%
Price: $200,000
Down Payment: 25% ($50,000)
Loan Amount: $150,000
Monthly Cost: $1,666 (Mortgage, Property Tax, Insurance, Maintenance/Repairs, Property Management Fees,Vacancy)
Rent: $2,000
Monthly Net: $334
Yearly Net: $4,008
10 Year Cash Rents: $40,080
Short term you can see that property #1 generates $1,500 more per year and $15,000 total dollars more over the 10 years in terms of rental revenue. But if you factor in potential sales profits, then property #2 winds up generating $35,000 more over the 10 years. A lot depends upon your short and long-term goals. You plan may be to hold the property as long as possible and use the rental incomes as a recurring revenue stream. In that case property #1 may be your best option.
Also consider that property #2 was twice as expensive as property #1, so if holding the properties for recurring rental incomes was your goal, you could have purchased two homes valued at $100,000 and realized double the amount of rental income.
All of the above is just speculation to make you think about your options. In the end the perfect home for you depends upon a number of variables including your available capital to invest, the properties available to purchase, your ability to analyze the market, the rent prices the market will sustain, and the list goes on and on. The key is to do your homework and take out as many of the variables as possible so that you are better able to control your residential real estate investing strategy.
Whether you've purchased rental investment property before or this is your first investment property, our investment property service can help you by helping your evaluate and analyze investment propertiesWe recognize that there are a lot of factors that go into making a property a successful investment and put our experience and knowledge to work for you. Call us at 404-254-4502 or complete our Fast Form to learn more about our services.
