Investing in rental properties to earn income before or during retirement is a smart move. There’s a lot to consider before moving forward. Therefore make sure you weigh in on the property’s estimated revenue, returns, costs, benefits, and hazards. This will allow you to get the most out of your money. Invest in property only after a thorough research of various factors.
Key highlights of buying the rental properties:
- If you’ve done your homework, a rental property might be an attractive investment.
- Vacancies and damages are two more dangers that come with owning a rental property.
- If you have a rental property that is in poor shape, it might cost you more than it profits you.
What kind of rental property earning you can expect!
When looking for rental properties, it’s critical to consider if the property will create a sufficient income. After all, one of the major reasons to own rental property is to profit from it.
For example, let’s say you spend $100,000 on a home:
According to your research, the typical monthly rent for that sort of home in that location is $1,000. Then you may figure that your annual gross income (revenue before costs) will be $12,000 ($1,000 x 12 = $12,000). The property generates a 12 percent gross income on the purchase price ($12,000 / $100,000).
Use the 1 percent rule to determine whether the rental property has a strong chance of generating revenue, which states that the gross monthly income on the property should be at least 1% of the property’s price to cover prospective rental property expenditures. The property above, according to this 1% guideline, has high income-generating potential. It brings in $1,000 in gross monthly revenue or exactly 1% of the property’s value.
Even if a property does not fulfill the criteria, it may still be able to assist you in achieving your financial objectives. Similarly, if the quality or other characteristics of the property are missing, a property that meets the criteria may not be a good investment.
How much does it cost to own rental properties?
The 50% rule is a basic guideline for predicting costs. You should budget for 50% of your property’s total yearly income in costs. For example, a property that earns $12,000 per year may have $6,000 in costs.
Break down property expenses into two categories: operational expenses and capital expenditures to generate a more accurate estimate.
Property taxes, periodic maintenance and repair items, insurance, property management charges, and vacancy costs are all ongoing expenditures. Vacancy costs are the expenditures you’ll need to fit if the property is vacant for an extended time.
Large, unplanned capital expenditures are common. They might include everything from replacing a broken water heater or air conditioner to repairing a roof, fence, flooring, or plumbing system.
Continuing with the previous example, let’s say you estimate that annual running expenditures will be around $1,000. You intend to set away an additional $1,000 each year for capital expenses.
What are the key benefits of investing in rental properties?
You can calculate your cash-on-cash return from your rental properties using your gross revenue and costs. This will help you in determining its profitability.
Subtract operating expenditures from gross income first. That’s how you get $11,000 in yearly net operating income ($12,000 – $1,000). The cash-on-cash return is calculated by multiplying the net operating income by the rental property acquisition price (100 x ($11,000 $100,000)).
There is no hard-and-fast rule for what constitutes a “good” return. But a range of 8% to 12% is fair, making the 11% rate appear encouraging.
Keep in mind that the cash-on-cash return excludes both capital expenditures and financing costs (mortgage payments). Here’s how to figure out if you’d still have a positive monthly cash flow after these expenses: Subtract the monthly net operating revenue from the monthly capital expenditures and mortgage payment.
Your monthly net operating income in this scenario is roughly $917 ($11000 / 12). Subtract $83 from $917 to get $334 in monthly capital expenditures and a $500 monthly mortgage payment. After capital expenditures and finance, this is your cash flow.
The rental properties may be a reliable source of income. But like with any investment, you must understand what you’re getting into before making a purchase.
Examining the property’s prospective revenue, expenses, and return might help you in determining its profitability. An experienced property manager can help you decrease risks by helping you in finding high-quality renters. They may also know others in the region who can undertake repairs at a lower price.
Consider consulting with a certified public accountant (CPA) who has worked with clients who own rental properties. They’ll have worked with a lot of customers who have had both good and terrible experiences with rental houses. They’ll be able to give you an unbiased opinion on renting. They can also show you how to increase your earnings.