property, real estate investing

 

INVESTING IN INCOME PROPERTY IN A COLLEGE TOWN CAN BE A WISE, PRUDENT DECISION!!!

 

While many people may understand one side of the rental property business because they have been tenants, there is another perspective that may be of interest to those who have a little extra cash that they’d like to use to turn into a profit especially while attending WSU.

 

Real estate has been considered as a decent, long-term investment that can provide us with some reasonable level of diversification. Its historical returns have been somewhat lower than stock market returns over the long run as measured over the length of a few decades: from 1978 to 2004, housing has turned in an annualized return of 8.6%, whereas major stock market gauges have given us 13.4% returns.

So when housing is a necessity for your son or daughter while attending WSU why not take advantage of this excellent investment opportunity by purchasing income property where you can realize rental income from other tenants and where a sunk cost (rent) for your son or daughter actually goes toward the mortgage payment.  In a college town, the rental markets are rather stable with a consistent demand for apartments and in a college town like Pullman where WSU enrollment has been increasing this type of investment is that much more sound.

 

THE HOWS, WHATS and WHYS OF INCOME PROPERTY

Why rental income properties make a sound investment?

There are a number of reasons of why real estate and rental income properties specifically make a good investment, but here are few basic reasons:

1) You are leveraging and using OPM (Other People's Money)

The beauty about rental income properties is that you are making money using OPM: the bank's money (i.e. via a mortgage loan), and via your renter's rent money (i.e. the person paying the mortgages and property bills on your behalf).  Further, the rent on a good rental income property should cover all or most of the expenses related to your property including mortgage payments, property taxes, and insurance. As long as you can keep your place rented, and as long the property is in a good area you are likely to profit handsomely over the long term while leveraging OPM.

2) Real estate is generally a sound/stable investment over the long term and a good way to diversify.

Sure, we do encounter declines in some centres as cyclical recessions hit, but over the long term real estate has been a sound investment. Look at the market today - it is a buyer's market (you are in control and name your price/investmetn).  Real estate offers an opportunity to diversify one's portfolio beyond equities and the stock market.

3) There are favorable tax advantages in owning rental income properties.  I am not an accountant nor will I pretend to be one so please call your accountant on this point.

How do you make money off of rental income properties?

1) The renter pays off your mortgage over time

A good rental income property will bring in enough rent to cover all or most of the mortgage bill, which is comprised of a principal and an interest portion. Over time, the rent will pay off more and more of the mortgage principal adding to the investor's equity and adding to the investment’s returns.

2) The property appreciates

A property in a good location will typically appreciate over time. As the property appreciates, so does the investor's equity and return.

3) The multiplier affect

As time goes by and the investor's equity grows as per points 1 and 2 above, one can refinance the property with the bank and use a percentage of the the gained equity to make an additional rental income investment (i.e. pull out a percentage of the equity from the investment based on the bank's minimum requirements). In essence the returns earned from one rental income property can be used to purchase another property allowing one to add to his/her real estate portfolio and allowing one to grow their returns exponentially. It's like a fruit tree bearing more and more fruit over time.

 

Lower purchase prices and interest rates are making it easier—even for an individual investor—to find a single-family home, condo, or duplex/triplex that brings in more than enough rent to cover mortgage, taxes, insurance, maintenance, and other expenses. And with so many properties lingering on the market, buyers can have their pick.

 

Pointers To Consider As A Real Estate Investor

When researching the income potential on a piece of property, here are a few things to consider.

You should:

  • Be comfortable with your financing strategies. The bottom line here is whether you can afford to take on a significant investment that can potentially occupy a lot of your time and money.
  • Talk to other property owners and pick their brains. Find out what it’s like to be a landlord by talking with other rental property owners of similar properties to get several perspectives on the realities of the business.
  • Check sales comparisons. Determine going rates for similar properties and what gets covered in the pricing of rental units for sale. I will do this for you!!!
  • Consider the possibility that not all units will be rented immediately, leaving you with a lower amount of income in the first few months.
  • Know what your basic expenses are going to be: start out by tallying up the amount of your monthly mortgage payment as well as the cost of your property taxes.
  • Check into the cost of insurance for your property and what the policy will cover on the rental property. Estimate the cost of the premium in monthly increments.
  • Consider what the rental price will cover for your tenants. Some landlords opt to pay for some utilities such as sewage, water, and heat while others choose to pay for nothing extra. There are pluses and minuses to each decision, especially if you choose to pay some of the bills. Be prepared for tenants who may take advantage of the “free” services and utilities that you offer and consider these factors when calculating your potential costs.
  • Account for the cost of advertising and marketing the property to potential renters. If you plan on requiring credit checks or other requirements for prospective tenants, make sure you know what costs will be incurred.
  • Look into hiring a property manager if you’re unable to dedicate much time on your rental units. Being a landlord will require a time commitment and depending on your level of experience as a landlord or on the number of units you own, it may be a challenge to perform the work of a property manager if you are not a full-time investor. If the work and effort is something you can’t muster, you may want to outsource some of the real estate management tasks involved. I can refer you to local property managers.
  • Estimate the amount of money that will be spent annually on maintenance and repairs. To achieve a ballpark figure for a monthly amount, take the amount equal to 1% of the value of the property and divide it by the number 12 to get a figure for the cost of monthly cleaning, maintenance, and repairs.
  • In addition to the repair costs, take into consideration other requests from tenants for replacements of items like window screens, faucets, door locks, along with other reasonable requests.
  • Remember to ask for, and hold on to security money given to you by tenants. Have this money available in the event that a tenant requires a refund of the deposit, or in the event that a unit needs repair work after a lease expires.
  • Carefully weigh your expected income against the expenses you’ll incur as a landlord. Consider the pros and cons of the “landlording equation.” Once you’ve estimated the figures for both income and expenses from a given property, you’ll need to subtract the expense total from the monthly income that you anticipate in order to calculate the cash flow of your rental property. If the cash flow you’ve calculated is positive, you’re one step closer to ascertaining that the profit is well worth the investment.

It's all about cash flow (POSITIVE CASH FLOW)!!!

 

Please email or call Chud today to discuss the key metrics on determining whether a certain income property is a wise investment and to find out what the current rental market returns are.