9.1.2023
Members:
Have you ever wanted to earn additional income through real estate? This month Skyline 101 is focused on buying an investment home and what it takes to get started.
First up, when it comes to owning multiple homes, you have to consider the following questions:
- Time management: how will you manage the property in addition to your own home?
- Money management: how will you appropriate charge rent to ensure that you are profitable each month and create positive cash flow?
- Down payment: do you have the 25-30% to put down on an investment property?
- Monthly expenses: how will you budget for monthly expenses such as the water bill, landscaping, or snow removal?
How much money do I need to get started?
This is the most common question when it comes to buying an investment property. The first step is establishing a budget overall. You need to sit down and figure out what you can realistically afford. Or, if you cannot yet afford the down payment, you will need to budget on how you'll save to get the down payment.
- Most lenders will require a 20-35% down payment. That means if you are buying a $350,000.00 multi-family home, you'll need to have the below funds available:
- If 20% Down Payment: $70,000.00
- If 35% Down Payment: $122,500.00
- Taxes to pay in advance: Each state and county may have different tax calculations, in the state of Connecticut, we operate on a mill-rate with 70% of the value. So, if the town has a mill rate of 45.41, then your taxes are calculated by multiplying 70% of $350,000 to get you $245,000 and then 45.41 times 245 to get your annual taxes of $11,125.45.
- Insurance to pay in advance: You'll need to contact an insurance company for an official quote, but for demonstration purposes, we'll say $4,500 per year.
- Total you'll need to get started based on all the above: $85,625.45 -$138,125.45.
What's the income look like?
In real estate, you want to be able to charge a reasonable rent that is within market, but also profitable for yourself. When using the same example of the $350,000 multi-family home as above, you'll be looking at budgeting for a monthly income as follows:
| Budget* |
Income |
Expense |
| Mortgage |
|
$2,586 |
| Taxes & Insurance |
|
$1,375 |
| Landscaping |
|
$150 |
| Utilities |
|
$95 |
| Subtotal Expenses |
|
$4,206 |
| Unit 1 Rent |
$1900 |
|
| Unit 2 Rent |
$1900 |
|
| Unit 3 Rent |
$1900 |
|
| Subtotal Income |
$5,700 |
|
| Monthly Net |
$1,494 |
|
| |
|
|
What's the risk look like?
When it comes to managing risk, a landlord will need to plan for the following:
- Delinquencies:
- What do you do when a tenant does not pay their rent?
- Do you have an eviction attorney in your network?
- Do you have cash reserves in place to supplement the non-rental payment?
- Home Replacements
- Do you have money set aside for things that may need to be replaced, such as:
- broken doors
- broken windows
- a furnace that may have expired
- a leaky faucet or leaky roof?
- Do you have time to mow the lawn or shovel snow?
- What happens when the landscaper cannot make it out in time?
- What happens if you cannot afford a landscaper?
As always, a Skyline team member is here to help you with any questions.
Thank you for your membership,
James A. Higgins, MBA
President and CEO