Am I prepared to make a long-term commitment (at least 3 years)?
Do I have the capital or funding to:
- Purchase properties
- Make a down payment
- Qualify for mortgages
- Meet purchasing expenses, such as lawyer’s fees, taxes, and adjustment costs. (If you are not able to gather enough money for these expenses, you may be able to find a family member or financial partner to help you with your financing. This is called “Joint Venturing”.)
Am I willing to educate myself and do all the necessary research?
Will I still be able to sleep at night, or am I going to worry over every detail?
The most common type of real estate investment involves the purchase of rental housing. Condos, townhouses, single family residences, and duplexes, all the way up to multi-family housing units, can all bring you a positive cash flow and increase the equity in your portfolio.
Before running wild and looking at every property on the market, save yourself some time and energy by performing this simple calculation: Analyze what the current rents are for a particular type of property, and calculate the yearly rent. Divide this number by the purchase price of the house. If the result if higher than 8%, this property may be worth looking at further.
For example: If the average rent for a single family dwelling in your neighborhood is $750, the yearly rent will be $9000. Now say you think you can buy the house for 100,000. Divide yearly rent ($9000) by purchase price ($100,000) and you will get an answer of .09, or 9%.
After going to view a property that meets the 8% rule, you must calculate all the monthly expenses. (Some items are paid yearly, such as insurance and taxes. Divide by 12 to get the monthly total. )
Here’s a list of expenses to consider:
- Mortgage payment
- Insurance
- Taxes
- Utilities (unless you will require your tenant to pay them)
- Improvements and/or repairs
- Maintenance (usually 5 – 10% of monthly rent)
- Vacancy allowance (usually 10% of monthly rent)
- Strata fees, if applicable
- Property management fees, if applicable
After comparing the total expenses with the monthly income, you will be able to see if you can put any money in your pocket each month.
If you have decided that you’d like to go ahead with the purchase of this investment, and you think you may want to eventually purchase a number of properties, it is beneficial to have a team of professionals to assist and advise you. You will need a realtor, a mortgage broker, a lawyer or notary public, an account, an insurance broker, a home inspector, and possibly an appraiser.
The income that an investment property provides is not limited to the monthly cash flow. Consider that each time you make a mortgage payment, you are in fact paying yourself. (A mortgage is like an enforced savings plan.) Don’t forget that the interest on your mortgage is tax deductible. You can also find out from a realtor the average yearly increase in the value of properties in your community. The banks are usually quite willing to give you a line of credit once your property has gone up in value, to allow you to purchase more real estate.
Real estate investing can be beautiful! Not many careers will pay you even while you’re sleeping. Not many jobs will allow you to set the schedule that works best for you. And few other jobs can be as financially rewarding. After all, according to statistics, over 90% of millionaires have made their money in real estate.