Analyzing an Investment Property

I'm keeping today's post short & sweet, but it couldn't be a more important message! 

Prices have come down since we hit the peak of the market earlier this year & when you're investing you want to take your advantages when & where you can get them. A "down" market is certainly one of those times. And on the face of it, some of the lower prices look very attractive, BUT now more than ever it's important to know your numbers!

This summer for example, a client of mine was looking for an investment property with very specific parameters & after each showing we stood at my car, with my laptop on the hood of it, & plugged the numbers into a spreadsheet I designed for him, to see if the numbers made sense - FOR HIM & what he was trying to accomplish. In the end, none of them did. And that was an important exercise because there was more than 1 occasion where he was ready to move forward on a property until we really broke down the numbers.

Analyzing an investment property is more than just the purchase price & interest rate.

The purchase itself would be the:

- Negotiated Price

- Deposit - essentially the downpayment on your downpayment, which is due when an agreement is accepted

- Downpayment - balance of the downpayment due at closing - a minimum on a rental would be 20%, but some lenders require more

- Closing Costs - aprox 2% of the purchase price which should cover Land Transfer & legal fees

- Mortgage - your terms & interest rate

Pretty standard, right? But here are some line items that are often overlooked or under estimated when doing an analysis, & should be considered before ever getting to the point of an Agreement of Purchase & Sale:

Insurance - insurance on a rental property will cost a little more than a regular residential policy & will have stipulations as to the kind of insurance your tenants are required to have, including liability coverage.

Repairs & Maintenance - a good rule of thumb is to account for 0.25% of the value of the property each year to address any repairs or maintenance that is required PLUS an allotment for capital costs that you would spread out over a period of time, depending on what they are. Need a new roof? You spread that cost out over the lifespan of that roof...

Vacancy Allowance - another good rule of thumb is to account for a 5% vacancy or credit loss in case you run into difficulty renting the property or a tenant not paying the rent.

Other Expenses could include: property management, snow removal, grass cutting, condo fees (if applicable), utilities if you're including them in the rent, water heater rental, property taxes etc...

What's the total income (actual or potential)? Rent, laundry, parking?

Important Consideration - Are you inheriting a tenant & the rent they are currently paying? Or are you able to set current market rent for a new tenant?

Quick & dirty calculations:

Revenue minus Vacancy Allowance = Net Revenue

Net Revenue minus Total Expenses = Net Income (NOI)

Now how does that Net Income (divided by 12) compare to your potential monthly mortgage payment?

You need to be brutally honest with yourself on every aspect of an investment like this because once you are a landlord, many aspects of your investment are out of your control.

I don't say this to scare you off, but to empower you to make the best decisions possible...and I'm not reinventing the wheel here either, google analyzing an investment property & there are 32M hits & many spreadsheets & calculators to choose from.  But they're only as good as the information that you put in them...

Until next time,

No comments