How Much Is A 30-Year Fixed-Rate Mortgage Going For Is Owning Rental Property, For You?

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Is Owning Rental Property, For You?

For some individuals owning and managing rental real estate is a great idea, while for others it may not be! The difference refers not only to the specific property, 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 the down payment, closing costs, reserves for repairs, upgrades, renovations and contingencies. In addition, some people are better suited to owning a rental property than others because some do not want the stress and strain associated with this type of commitment. With this in mind, this article will attempt to briefly review, review and discuss some of the key factors and considerations that one should research thoroughly, in depth, before taking the jump.

1. Personal Finance: Do you have the necessary funds and will you qualify for whatever financing is needed? Obtaining a mortgage on a property that is not owner occupied is significantly different than the process for a personal home. In most cases, a larger down payment is required (often 25% instead of 20%). Also, the requirements differ because not only do you have to clearly demonstrate, the same things you do for a personal loan, you also have to demonstrate that the property is financially viable and the rentals will handle cash flow. It is important to have several reserves, including: a) repairs; b) repairs; c) upgrades; unforeseen contingencies etc.

2. Property finance issues: I’m a stickler for 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 property worth $500,000, 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 the real estate 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 each month is approximately $3,000. If you calculate that the upgrades, repairs etc. is another $12,000 per year ($1,000/month), you should use that $4,000 per month figure for your preliminary calculations. In addition, base your income on each unit being unoccupied/vacant 2 months per year to proceed conservatively. This means you must collect rent – a roll, total, from all units, of at least $4,250 per month. You should also make sure that your net income should generate approximately $32,000 per year.

3. Dealing with support issues: Are you comfortable with these challenges and responsibilities?

4. Working with tenants: Are you ready, willing and able to deal with tenants and collect rent, enforce leases, meet tenant needs and related personality issues?

5. Opportunity costs: How does owning these properties (be sure to factor in appreciation, depreciation – benefits and net income) compare to how you might do with other investment vehicles?

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

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