So, you are looking at properties – perhaps you have found some good deals and are thinking, “maybe I will buy that property and generate some rental income.” But before you do this, you need to make sure the numbers work and that you are financially sound. There are 2 things you should do before making such a decision.
- Get the pre-approval of a loan- While there are some people that will pay cash for a property, many people will need to get a loan. Just because you qualify for a certain amount does not mean you can actually afford that amount. Be diligent in your decision making.
- Run the numbers- The biggest mistake new landlords and investors tend to make is thinking only about the mortgage, taxes (if applicable) and insurance expenses. However, you must also think about the times the property might be vacant, regular maintenance and emergency repairs. There are a lot of income calculators out there. Find one and make sure your property’s income will cover expenses. Please make sure that emergency repairs do not drain your savings. Have money set account to cover an unplanned expense.
The following should be considered when running the numbers in a rental income calculator.
Purchase price- This is either the list price or the amount you are willing to offer
Down payment- Most calculators will allow you to enter this as either a percentage or numeric amount.
Loan Amount- This is the selling price minus the down payment
Income: If the property already has a tenant, this is easy. If not, base this on what other properties in same condition, location and size are renting for. Not what you want the property to rent for.
Mortgage Interest: Do not forget this expense.
Property Taxes: If you live in a country that doesn’t have a property tax count yourself lucky, otherwise make sure you cover this expense.
Expenses: Unless you know exactly what these are we recommend setting this to around 30% of your yearly income. Things to keep in mind are the following: Age of property. Does the property have a yard, pool, fence, detached garage? How long has it been since roof was replaced or any plumbing repairs or renovations? How old is the electrical system? Has the foundation been maintained? Don’t forget pest control.
Insurance: This is typically about 5% but can vary due location so make sure you have an accurate number for this.