Would You Ever Buy an Investment Home?

Have you ever considered buying an investment home?

Would you ever buy an investment home?

I’ve liked the idea of buying investment homes ever since one of my friends bought a small house and started renting it out. That happened 5 years ago, before the housing market crashed, but here’s the beauty of it: since she was buying a house for the sake of collecting rent — and not for the sake of hoping the price will increase — she’s not upset by the housing crash.

She says the resale value of the house is irrelevant. Either she collects rental income, or she doesn’t. The change in her home’s re-sale value has nothing to do with it, unless it affects her chances of finding renters.

I did a little research and came up with a few pointers for buying investment homes:

#1: Run the purchase price through a calculator mortgage, which will help you figure out ALL of the main costs: mortgage, insurance and taxes. You’ll see how much you need to spend per month.

#2: Multiply the purchase price by .01, which will show you 1 percent of the purchase price. This is your yearly “operating cost” for repairs, including spreading out the big once-a-decade expenses like replacing the water heater or replacing the roof. (That’s just a general rule of thumb; obviously if you buy a fixer-upper you’ll need to spend more.)

Divide your yearly operating cost by 12 to get an idea of your monthly repairs-and-maintenance bill, and add it to your monthly mortgage/insurance/taxes. Remember, you won’t literally pay this amount every month, although you should set this amount aside each month into a savings account that’s earmarked for those once-every-10-years expenses.

#3: Figure out how much you can collect in rent per month.

#4: Subtract 10 percent for property management fees, and another 10 percent for vacancies. This is your net rental income.

#5: Compare your net rental income to your monthly expenses (mortgage/insurance/tax/repairs/maintenance). See which one is higher. If your income is higher, it’s a great buy. If your expenses are higher, then look for a different house.

The purchase price makes a big difference, since it also determines your property tax rate and your insurance rate.

If you want to know more about calculating the mortgage on an investment property, try this buy to let mortgages calculator. (“To Let” is the British term for “to rent” or “to lease.”)

The info on that site – just like the info in this blog – is general information. Don’t construe this as professional advice, because it’s not! Talk to a professional if you need professional advice; my blog post is just a chance for me to informally share my thoughts with you.

Thanks to James Thompson for the photo.

This week I was in the Festival of Frugality.

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