One of the keys to investing in real estate is knowing how the
numbers work.
Here are some keys to success when investing in real estate.
Have a team prepared: Some people that you will want on your team are a real estate agent, home inspector, lawyer with experience in real estate, and a dependable contractor. Do some research when looking for each of these, or it could cost you time and money
Know what
you can afford for a down payment: For residential real estate purchases
in most states you will need a down payment of 20% or more. That means when a property is selling for
$100,000, you will need to invest a down payment of $20,000. Why such a large
down payment? It will give you a lower monthly mortgage payment and put more
monthly cash flow back in your pocket. Also if you were to lose a tenant and be
vacant for a month it would make your liability easier to manage.
Location: It doesn’t have to be the best location but
it does have to be a community where people want to live. Do some research with
your real estate agent, and by yourself to figure out where desirable
neighborhoods are?
Do the numbers work?: Simple math will let you figure a
rough estimate of the Return On Investment (ROI). Here is an example.
There is a house for sale for 150,000. The rents in the area are
1100- 1400 per month. Monthly utility expenses are 350 per month.
First we need to know what 20% of 150,000 is. 150,000 X .20 = 30,000 down payment.
Then we need to figure out the annual income and expenses.
Income= (1100 X 12=) 13,200 gross yearly
Expenses= (350X12=) 4,200 yearly
Now we need to figure out our net income:
Income – Expenses= Net Income
13,200 – 4200= $9000.00
To figure out the return on investment we will take the Annual Net
Income and Divide it by the down payment investment.
9000 – divided by- 30,000= 30% ROI
*Remember this is just an example for a method that you can use to
figure out if a property is worth pursuing. In this case I would pursue this
property, because it is in our target area and delivers a very nice return on
investment.
This method also works on larger multi-unit apartment buildings.