Monday, September 16, 2019 / by AJ Shepard
There are different avenues of investing in real estate, one is the traditional way of saving up enough cash for a down payment, then renting the property out. Now, what type of property should I invest in? The answer to these questions is a personal preference. Either a multi-family dwelling or a single-family dwelling are the two most common investment property types, commercial property investing is the other main avenue for investors. Once you have decided between single or multi-family, now comes the fun part, looking through deal after deal until you find one where the numbers make sense for you. One example is a duplex, where you purchase two units and rent both of them out to tenants. Say the duplex costs $450,000, usually a 25% down payment is required for investment properties, but if you want to live in one unit you can usually put as little as 3.5% down! Now that you found the property it is time to “run the numbers.” Some monthly expenses to consider; loan payment, property taxes, insurance, capital expenditures, maintenance, landscaping, and utilities. Utilities are one that can be included or not depending on if the rent you charge includes utilities, or if you decide to make the tenants responsible for all utilities, which is highly recommended. After you estimate all monthly expenses, let’s say they add up to $2500 per month. Now if you rent both units out for $1500 per month you will make $500 per month of cash flow, and your loan will get paid down every month. Eventually, you will have your loan paid off over the next 15-30 years, and your property will theoretically appreciate at the same time. Meaning, in 15-30 years when your loan is paid off you will have monthly cash flow and an asset that is worth more than $450,000. This is one example of the numbers, and not every deal “pencils” out like this, some will not cash flow positively right away, and some will cash flow more than $500 per month. This principle applies to a single-family dwelling as well. Calculate the monthly expenses, and see what the rent for the area your property is in for that type of house. If the rent for the area is higher than what your expenses are, that is a good the deal, if the area your property is in has a fast appreciation rate, but the monthly cash flow is negative, it still may be a good deal because of your asset is going to be worth a lot more when you go to sell it.
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