While some individuals, purchase multi – family houses, in order to reduce their personal living expenses, many, do so, as an investment property. This article will review and examine, some of the items, one should seriously consider, and evaluate, prior to making the final decision, regarding purchasing, for investment purposes. When purchasing an investment property, one must look at it, differently, than when considering, s private, personal home purchase! While there are many considerations, this article will attempt to briefly examine, and consider, 5 key issues, which, when done properly, significantly reduce the amount of risk.
1. Return on Investment (R.O.I.): When people purchase stocks, etc, they normally attempt to evaluate and consider, the range of yield and/ or return, they anticipate, and use that as a key consideration. With multi – family houses are considered, from an investment perspective, it’s important to do, something, similar. While there are many formulas, for considering, Return on Investment, the ROI should be reviewed, using a conservative approach, evaluation and consideration. At least, 2 measures should be used: one, is based on the purchase price, and the other, on cash flow. The purchase price should be considered, the price one pays, plus alterations, etc, performed immediately. Therefore, if one purchases a property for $475,000, and immediately expends another $25,000 on upgrades, etc, the number used should be $500,000. After expenses, maintenance, etc, one should seek, a return, of at least, a net, of 6%, or, in this example, $30,000 per year. The cash flow calculation should factor in rents received (use 85% of rent – roll, to prepare for possible vacancies, etc), and the amount of the monthly mortgage (principal, interest, and taxes), plus a reasonable consideration for regular maintenance items, should be subtracted from this number. For example, if mortgage payments are $2,000 per month, and maintenance contingencies are another $250 per month, then, one should seek a rent – roll, which is, at least $2,650 per month (Remember, 85% of $2,650= $2252.50). However, while that creates a break – even, the goal, and objective, should be a positive cash flow, and a recommended $2,850 rent – roll ($2850 x 0.85= $2422.50), and this would provide a positive cash flow percentage of about 7.66% (172.50/ 2250)
2. Condition – necessary improvements: Consider the condition of a prospective property, with a keen – eye, on what you will need to do, immediately, to bring it to the optimum rental condition! Obviously, the more pristine, a property’s condition, the better, if the amount of improvements, plus the selling price of the property, makes sense, consider proceeding.
3. Actual, anticipated, rent – roll: Do your calculations, in terms of rent – roll, based on the lower, or lower – middle, end of the market! Then, use the 85% rule!
4. Ease of renting: Examine the local real estate market, and examine, how readily, units are rented, when available. In the best – case scenario, use the 85% rule, but, in slower local markets, adjust the figure, and use, perhaps, 60 to 75%.
5. Community: What are the pluses, and minuses, of the specific area? How might these impact, the rents collected, and how easily, units might be rented?
The wise investor in mult – family properties, especially those with 2 – 6 units/ apartments, uses the conservative approach, in order to maximize his return, and minimize his risk/ exposure. There is never any guarantee, but historically, smart real estate investors, have done well.
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