How To Determine If A Rental Property Will Cash Flow 4 Main Considerations For Purchasing Smaller, Investment Real Estate!

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4 Main Considerations For Purchasing Smaller, Investment Real Estate!

Smaller investment properties often offer significant financial/economic benefits in terms of creating a combination of asset growth, return on investment and a degree of security! However, this is true, only if the buyer first thoroughly understands what to look for and why! Different potential properties, have, vary, potential, for optimal performance, etc.! While not everyone can, consistently, care for, afford or engage in large deals/property purchases, many more can take advantage of smaller properties, etc. These vehicles often include one, four, family/units, houses and, while some offer attractive investments, others, maybe not, always! With this in mind, this article will attempt to briefly consider, examine, review and discuss 4 significant, meaningful, major/essential considerations and ratings.

1. Cash flow: Cash flow, when it comes to them, usually refers to the difference between funds received/income and monthly expenses. It is important to consider this, in a conservative way, basing estimates, not on the highest, potential rents, but on market rents and, no more than 75% occupancy (to avoid a potential, cash – crush, if there are any interruptions, due to various possibilities/unforeseen circumstances). Additionally, an investor must be careful to ensure that their personal cash flow does not suffer by using too high a percentage of their reserves for start-up costs, as well as building reserves, etc.!

2. Area/neighbourhood/local market: Before you make the leap, thoroughly consider and evaluate local real estate market conditions and discover the rental market in terms of availability, demand, pros and/or cons! Get to know the specific area well and determine, if it offers, the best scenario for you, your priorities and purposes!

3. The 6% Rule: Many pay close attention to what is often referred to as the 6% rule when it comes to buying smaller investment properties. This means that three quarters of the real rent must generate at least six percent of profit. Expenses must include: mortgage-related expenses, including principal, interest, taxes and escrow; landlord – paid utilities; repairs; renovations; upgrades and reserves etc.

4. Condition of the property: Understand the existing condition of the property in question and what will need to be addressed, immediately, mid-term and long-term. Reserve funds must be used and prepared for as many contingencies as can be foreseen, etc.! On the other hand, do not be overly influenced by staging, and overestimation, rent-rolls!

After over 15 years as a licensed Realtor in New York State, I strongly believe in the possibilities and benefits of investing in smaller investment properties, but only when done carefully, and with focus! The smarter you act, the better off you will be!

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