A rental that looks great in the listing photos can lose money every month. Before you buy, run these five numbers. If you cannot fill one in with a real answer, you are not ready to make an offer.
1. Purchase price plus repairs
Add what you will pay for the house to what it will cost to make it rentable. Be honest about the condition, and add a cushion for surprises.
2. Realistic monthly rent
Look at what similar homes nearby are really renting for, not what the seller says it could rent for. Rent is the single most overestimated number in rental deals.
3. Operating expenses
- Property taxes and landlord insurance
- Vacancy, because every unit sits empty sometimes
- Repairs and a reserve for the roof, HVAC and other big items
- Property management, if you hire a manager
- HOA dues, if any
4. Financing costs
Investor loans often have different terms from owner-occupant loans. Get actual numbers from a lender instead of assuming. Talk to Nil about approved lenders.
5. Cash flow and cash-on-cash return
Monthly rent minus expenses and loan payments is your cash flow. Divide your yearly cash flow by the cash you put in, and you have a cash-on-cash return. It is a quick way to compare deals, as long as every number above is honest.
If the deal only works with perfect conditions, pass. Read more on first-time investing and buy-and-hold rentals.
Investing involves risk, and past results do not guarantee future results. Nil Patel is a licensed Georgia real estate salesperson with Keller Williams Realty Atlanta Partners. This post is general information, not legal, tax or financial advice.