Seasoned property investors seem to get a good grip on the finances effecting the overall cash flow of a new or potential investment property, which allow them to have a profitable investment experience. This skill is acquired over time and needs to be acquired by new investors if they have any hope of making it as an investment property owner. Most of the finance skills come into play when assessing a given property and the finance terms that will be required to own the property. Add to this the estimated operating costs and initial improvements that may need to be done and the cash flow analysis can get a bit murky.
I have seen to many web posts from new investors who quickly get themselves under water. Being in the ‘red’ at a purchase/closing is not a good place to be and the situation will likely get worst very quickly as unforeseen or unexpected situations occur, effecting the investments bottom line. Unfortunately there is no one looking over their shoulder and giving them solid investment advise, in person.
A bare bones list of financial considerations to comprehend in any given investment property will include the following:
- Real Estate taxes— Are they likely to go up? When was the last assessment? What is the current rate?
- Utilities— Are all utilities separately metered? If not what will you then need to do to change this, (how much will this cost) or what will the monthly fee for the added expense be?
- Terms of Loan— Shop around on this one. You want the best interest rate you can find, don’t just take the first offer. Have a few possible lenders in play and see which one seems to be the best deal if possible.
- Rehab—The investment might be a great bargain, (lets hope so) but understand the functional upgrades that may be required either immediately (leaky roof, outdated furnace, substandard/drafty windows) and what might need attention in the immediate future. Price this out and try to avoid getting that blanket quote from a general contractor, for what they feel it would cost for all upgrades and repairs.
- Insurance— Again shop around, don’t take the first quote. Make sure you know what you are getting for this insurance quote. Comparing different quotes will usually alert you to specifics being covered by one company and not the other, read the fine print.
- Other Costs— Association dues, water bills, snow plowing and pest control bills can add up. Ask what the last owner’s other costs might have been and factor those into the monthly costs.
- Current Rental Market Rates—Here is one area that you will want to research. Just because there is a history of current rental rates for an investment property does not mean that it’s the proper rate for the rental units. Find the comps and adjust accordingly to find the fair market value for the units.
In future posts I will devote more thought on each of these categories and expand on any trouble spots that might typically be encountered. Being new to investment property ownership will mean you have either no clear expectations of what a good investment is financially or you might have false expectations. Note that a veteran in buying, selling and managing investment property will have better terms on loans and will likely pick a property more for the bottom line of positive cash flow, rather than simply buying because the property is a ‘cool place’ or seems like a good deal. The only good deals that I have seen when purchasing a property have emerged after crunching all the numbers. A few properties seemed like a good investment, but once all the numbers where in, proved to be to iffy or an out right bad investment.