Buying Your First Investment Property

By Author: zack wiest
Total Articles: 6
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Are you looking to purchase your next or maybe first investment property? In either case, you better know how to properly analyze the numbers. If you already own an investment property and are looking to add to your portfolio then you may have a leg up on a new investor when analyzing a potential deal.

Did your first deal go as planned? Did the numbers turn out to be what you thought they were going to be? Let’s put the renovation aside, even though if the property needs renovation this can make or break your deal as well, and let’s look at how you should be analyzing a long term buy and hold deal.

I have seen some individuals who say to analyze a buy and hold deal (rental property) they simple take the monthly rent and subtract the mortgage, and wow are they missing just a few important details.

Now, someone who is just trying to sell you something may use this type of analysis to make the deal look better, but you need to be the wise one.

So, let’s look what is missing from this analysis. The first items missing are the rest of the PITI, the TI, taxes and insurance. If you mortgage ...
... is fully escrowed then these are accounted for in your mortgage payment.

Next, you will need to deduct any utility costs the tenant is not responsible for. For example, in multi-unit buildings it is typically the owner (landlord’s) expense to pay for the water, sewer, trash, common area electric, and heat if not separated in the units.

Moving on you must look at any regular maintenance you will be paying for. If this is a multi-unit building, who is going to clean the common area, cut the grass, shovel the snow, etc... these all come with a cost.

Outside of these regular maintenance items you will have repairs such as; leaking toilets, dripping faucets, broken refrigerators, and the list goes on. Depending on the condition of the property you will want to allocate 5 – 10% of monthly rent toward a repair fund. Possibly more if the property is not going to be fully renovated before moving a tenant in, meaning new roof, new furnace, new windows, etc...

Simply putting $50 - $100/month away is not going to replace your roof 6 months into ownership. The next part of the analysis that needs to be accounted for is a vacancy factor. Yes, you may have a tenant for two years but when they move out you will have a month or two with a vacancy and you need to account for this.

Depending on your market and the type of property this can range again anywhere from 5 – 10% of rent. The finally item you need to determine is will you hire a property manager? If so, do not forget to account for their fee which will typically be 8 – 10% of collected rent. Now, as you can see analyzing a long term buy and hold deal is not as simple as rental payment minus mortgage.

Do not think you are going to return $400/month to end up really losing $400/month. Putting a little more effort on the front-side makes the backside return on investment much more predictable. At PA Deals we carefully analyze every deal offered to our clients and provide each client with a property profile containing a fully detailed profit analysis that accounts for all these items. Become an informed investor and visit PA Deals at http://budurl.com/padealsbmpart

PA Deals, LLC is a residential real estate investment firm located in Harrisburg, PA. Though founded in 2006, the principals of the company have been investing in real estate since the year 2000. You can find out more about us at http://budurl.com/padealsarticles.