Property Management Blog

Before Investing In a Rental Property, Do the Math | Decatur Property Management Education

Michael White - Monday, February 3, 2020
Property Management Blog

Finding a great house is easy. Finding a great house to rent out is a bit complicated, but still fairly easy. Finding a great house to rent out where the math makes sense is far more challenging. A professional property manager in Decatur can help.

Investing in Decatur real estate can be profitable and rewarding. However, it’s easy to make mistakes, and before you dive into what appears to be a dream opportunity, you need to do your math. If you’re not an expert in math as it pertains to real estate investing, find someone who is. This is a critical part of having a successful rental investment experience.

Understanding Cash Flow

A great investment property doesn’t have to cash flow right away. There are a lot of other great benefits to investing. However, it certainly helps your bottom line and your financial security if you buy a property that provides some immediate income. In the most basic terms possible, cash flow is simply the monthly income you earn minus your monthly expenses. To get an accurate idea of what your property will provide for cash flow, you need to predict as many monthly costs as possible. This may include professional property management, taxes, insurance, mortgage payments, maintenance, HOA fees, landscaping services, etc. Be detailed so you know whether you’ll be earning enough rent to cover those expenses and earn some cash flow.

Consider the 10 Percent Rule

Every real estate investor has a different threshold that they use to decide whether an investment makes sense. When you’re looking for a rental property, you can use the 10 percent rule or any other similar measurement to evaluate whether the purchase makes sense for you. With this rule, you’ll take the estimated annual rent that you expect to earn on a home. Then, you’ll divide that by the purchase price of the potential property. If the amount you end up with is greater than 10 percent, you can feel pretty confident that you’re making a smart purchase. The math supports your investment.

Prepare for Unexpected Costs

It’s important to be prepared for the things that you probably aren’t thinking about when you’re shopping for your next rental property. For example, you have to think about maintenance and repairs. A clean inspection report before you close does not mean the water heater won’t explode as soon as a tenant moves in. You’ll have to set aside a maintenance reserve for small repairs and major projects. Investors don’t always stop to consider the cost of vacancy and turnover, either. You could face months without rent coming in if you have trouble attracting tenants.

Prepare for professional expenses as well. Property management services are invaluable, and you’ll also need accounting help, legal assistance, and insurance advice. During turnovers, you’ll have to pay for cleaning services and carpet steaming and landscaping. You’ll also need to keep the utilities on and up to date.

Prepare for Unexpected CostsThere is a lot of math to consider when you’re investing in a Decatur rental property. We can help you take a clear look at where the numbers shake out, so contact us at 360 Real Estate Network before you buy.