If you’ve thought it over carefully, clearly defined your goals, examined your financial situation and are ready to jump into financing an investment property, there are really just three factors that will play a role in your success:
Rental income - The total amount of money that comes in every month from a property.
Expenses - Includes anything and everything that costs you money related to your investment, such as your monthly loan payment, maintenance fees, garbage collection, repairs, upgrades, etc…
Cash flow - This is your bottom line. Your cash flow is what’s left over after subtracting your expenses from your rental income. The amount of money you have in your pocket at the end of every month represents your success.
When you’re in the planning phase, estimating your income and expenses can be tricky. To help you, there are two guiding rules to follow:
- 2% Rule - Your ideal total monthly rent for a building should be 2% of the purchase price. For example, if you buy a $400,000 building, the rent should total $8,000. If the current rents don’t hit that number, you can slowly increase them until they get there.
- 50% Rule - Approximately 50% of your rental income will be spent on expenses. Using the same example, that means $4,000 each month will go towards repairs, vacancies, utilities, taxes, insurance, etc… leaving you with $4,000 in your pocket.
Remember these are just basic tools for guesstimating, but they should give you some fairly realistic numbers to work with. Of course, some months may be more costly than others, so you need quite a bit of money - about six months of expenses - set aside to cover the lean times. Please contact our lending team at CommercialLending@hfcu.org for more information.
To learn more about what is involved in financing an investment property, download our free eBook today.
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