The key to creating a successful real estate rental business is making sure your net rental income is positive. In order to do this, you must properly research the costs of owning property compared to the cash inflows you receive. You must also take into account the many different problems and unique situations that may present themselves, and be prepared for them.
If you're not properly prepared you could find yourself with negative net rental income, which will chip away at your savings or other sources of income. In order to avoid this, let's break down the costs, income and other things you need to know about in order to make a healthy return on your rental property.
Your biggest cost for your rental property is going to be the mortgage. Few people have the money to buy a piece of property outright. Even those who do are better off using the leverage mortgages provide to own more property. For example, instead of putting $100,000 down on one house you could put down $20,000 on five houses.
Research the market and find out comparable sales prices to insure you are paying a price in line with the market. Make sure to calculate in any closing costs into your calculations.
Next, add the costs of property taxes and insurance into your net rental income calculation. Tax amounts can be easily obtained from your local government or even real estate agent. Get an insurance quote from your agent and shop it around to make sure you're getting the best possible rate and coverage combination.
Repairs and maintenance are the next category of costs to consider. While it's impossible to know what exactly is going to break down a good rule of thumb is to set aside 1% of the properties value every year for repairs, maintenance and cleaning.
Finally, make sure to factor in any costs associated with advertising or acquiring tenants. Newspaper and online ads, signs, credit reports, and back ground checks all factor into this.
Now that we've figured out what we're sending out, let's look at what is coming in for our net rental income equation.
Rent is obviously the main source of income. Make sure the rent you are charging is in line with the market and also enough to cover your costs. Also make sure you are accounting for vacancy in your property. A good rule of thumb is to expect that your property will be vacant 7% of the year.
Don't forget about additional sources of income that can offset some of the costs. Application fees, late fees and security deposits can all be used to cover some of the above expenditures.
Make sure you thoroughly research the rental market for unique situations that may effect this calculation. For example, if every land lord in town pays for heat or other utilities you will have to also, or lower your rent to cover the difference. If not properly researched, you can find yourself with an empty house and the mortgage coming due.
By following these simple rules, properly researching the local market and being prepared for the unexpected you can easily earn a steady stream of positive net rental income.