Top Questions to Ask Yourself

Have you thought about renting your home or purchasing a rental property? When you are thinking about turning your home into a rental you have to ask yourself a couple questions. These questions are essential to ask and answer yourself before turning your home into a rental investment.

1. What rate of return will I be making?
2. Do I really want to be a landlord?
3. How will I be able to finance my next home with a mortgage in my name?
4. What is my exit strategy?

Rule Numero Uno

Whenever making any decision involving real estate investing, the first thing you need to do is calculate the net return you expect on your investment after deducting all expenses.

This can be done several ways, but the most well-known calculation for a real estate investment is the capitalization rate. This is done by dividing the yearly net income you expect to produce (without considering the mortgage) by the amount you paid for the property.

Example:

Real Estate Purchase Price- $100,000

Net Yearly Rental Income- $12,000

12000/100000= .12 or 12%

Now you are probably asking yourself, "but I have a monthly mortgage on my house, how does that work?" If you have a mortgage it is simple. You look at how much personal money you have placed into the property (closing costs when you bought the home, down payment, and any construction, not paid mortgage payments). Then take the yearly mortgage amount and subtract from  Net Yearly Income (Cash Flow After Mortgage Payments, known in the real estate investment world as Cash Flow After Debt Service CFADS).

Example:

Real Estate Closing Costs: $7,000

Down Payment: $3,500

Maintnence and Small Renovations: $2,000

Total: $12500

Net Yearly Rental Income- $12,000

Total Yearly Mortgage Payments: $7,200

Cash Flow After Mortgage Payments: $4,800

$4,800/$12,500=.38 or 38%

The above 38% return is the "cash-on-cash" return. This means the return on the actual out of pocket money you spent to acquire and maintain the property. Some in real estate view this as the most important return to calculate, but an exemplary real estate consultant would tell you to view both the capitalization rate of return and the Cash-on-Cash rate of return before making your decision. 

I will be writing a blog for each one of the questions you should ask yourself before renting your real estate. If you have any questions or comments, please contact me directly at res@reshilow.com. 

Kindly,

Ryan E. Shilow

A Johns Hopkins Master of Real Estate

Maryland Broker of Record