Have you ever considered buying 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 mortgage calculator, 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 per a tax tool and your insurance rate.
The photo was provided by James Thompson.