What Is The Difference Between Cash Flow And Net Income Is Owning Rental Property, For You?

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Is Owning Rental Property, For You?

For some individuals, owning and managing rental properties is a great idea, while for others it may not be the case! The difference does not only refer to specific assets, but also to each individual’s personality, attitude, and personal, specific strengths and weaknesses. Some factors include, of course, financial ones, including the necessary reserves needed to purchase a property, starting with a down payment, closing costs, reserves for repairs, upgrades, renovations, and contingencies. In addition, some individuals are better suited to owning a rental property than others, as some do not want the stresses and strains involved in this type of commitment. With this in mind, this article will attempt to briefly review, review and discuss a few key factors and considerations that should be thoroughly researched, in depth, before taking jump.

1. Personal finances: Do you have the necessary funds and will you qualify for any financing that may be required? Obtaining a mortgage on a non-owner property is significantly different from the process for a personal home. In most cases, a larger down payment is required (often a 25% down payment, instead of 20%). In addition, the requirements are different, because not only do you have to clearly show the same things you do, for a personal loan, you also have to show that the property is viable, from a financial point of view, and that the rents will handle the cash flow. It is important to have several reserves, including: a) repairs; b) renovations; c) upgrades; unforeseen events etc.

2. Financial issues of the property: I believe in the 6% rule, which means the net return should be 6%. For example, one factor is cash flow, while the other is total rate of return or return on investment/ROI. Therefore, if you buy a $500,000 property, put down $125,000 and have a mortgage loan of $375,000 and the rate is 5%, your principal and interest on a 30-year fixed rate vehicle will be approximately $2,000 per month. If property taxes and other escrow items, including insurance, etc. are, for example, $12,000 per year or $1,000 per month, your total out-of-pocket amount each month is approximately $3,000. If you estimate that upgrades, repairs etc. another $12,000 per year ($1,000 per month), you should use this $4,000 per month figure for your preliminary calculations. Additionally, base your income on each unit being vacant/unoccupied 2 months per year, to proceed conservatively. This means that you should collect a total rent from all units of at least $4,250 per month. Additionally, you should make sure that your net income must generate approximately $32,000 per year.

3. Solving maintenance problems: Are you satisfied with these challenges and responsibilities?

4. Business with tenants: Are you ready, willing and able to deal with tenants, collect rents, enforce leases, meet tenant needs and the personality issues involved?

5. Opportunity costs: How does owning these properties (remember to factor in appreciation, depreciation – benefits and net income) compare to other investment vehicles?

Is rental property ownership right for you? Consider the pros and cons and proceed wisely.

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