HOW TO BUY YOUR FIRST

Investment Property

Buying your first investment property is a big deal. It is a huge asset for most people, and it requires work. Many individuals actually view owning a rental property as being similar to a small business because it involves customers (tenants) and vendors.

Buying Your First Investment Property

Buying your first investment property is a big deal. It is a huge asset for most people, and it requires work. Many individuals actually view owning a rental property as being similar to a small business because it involves customers (tenants) and vendors.

If you think you’re ready to do this, here are some steps to consider…

The Mortgage

First, you need to answer the question: how much can I borrow?  To figure this out, you can use a mortgage calculator and plug-in the basic property information (price, loan amount, etc.).  If this is a rental property, it is important to remember that you need to look at buy-to-let mortgages, not just regular owner occupied mortgages.

What is different is that lenders of buy-to-let mortgages look more at the property as an investment and not whether the owner can afford it.  This means that the lender will look at the potential cash flow and expenses of the property.  They will most likely also compare rents of similar units in the area, and may even ask for a signed lease before underwriting begins.

Once you figure out the mortgage, it is important to look at the other costs.

The Extras

Every property is going to have the following that the owner will need to pay:

  • Property Taxes
  • Maintenance

You can usually get the property taxes quoted from your local assessor’s office.  As for maintenance, a landlord needs to budget for repairs to the property, as well as landscaping if necessary.  These can add up each month, so carefully plot out the costs.

For some maintenance, you may be able to recover the costs from the security deposit of the tenant if the damage was caused by them.  However, wear-and-tear is not usually covered by this, and you will need to bank for it.

Other expenses can be covered by either the tenant or owner, and it depends on the situation such as utilities.

The owner may want to pay for some utilities, such as water, because failure of the tenant to pay could damage the property, such as landscaping.  Or, in circumstances where there are multiple units on one meter, the owner sometimes pays and includes utilities in the rent.

However, the tenant usually covers all expenses related to the interior of the unit, such as electricity or cable.

Calculating Your Potential Return

Once you have figured out your costs, and looked at the potential rent, the true test of any investment is the return on investment.  Here is how you can break down the return on investment on a rental property:

First, take your total equity, and divide it by your annual return.  You can calculate your annual return by doing the following:

Gross Income – Expenses (including mortgage payment) = Cash Flow
Cash Flow – Income Taxes + Principal Payment = Return

To calculate your return on investment = current equity / total return.

It is important to calculate this return annually, especially relative to other investments so you can compare your rental property’s performance.  For a buyer, this is an essential calculation before buying.

 

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About Helen K. Burke with Intero Real Estate

Kim Ewald

Helen K. Burke

Intero Real Estate

5580 Almaden Expressway
San Jose, California 95118

(408) 835-8967

Helen@Helenkburke.com

For 20+ years I have delivered the highest level of customer service. I can provide references of my high level of service if requested. My relationship with my clients is of the utmost importance and I continually exceed their expectations during as well as after the transaction. My success stems from the “Business By Referral” method from day one of my career as well as a core belief that service and sincere commitment be delivered each and every time.

Having lived in the area since 1973 I have seen the growth and the changes within our community and I am knowledgeable and able to help you navigate the real estate process. I can prepare you for the move and help to make it as stress free as possible.

I started in the business in 1994 with my own Loan Processing company, I then became a Loan Officer. In 1996 I became a Realtor. I wanted to know the business inside and out. I have ranked within the top ten of Intero consecutively as well as received the honor of the “Value Award”. My on going training and commitment to excellence makes me the perfect fit for clients who want superior service. I am here to service anyone who needs help with buying or selling a home. I am also trained to help with people facing possible foreclosure and can inform them of all their options.