How does leverage affect an investment?
Debt increases investment returns as long as the cost of debt is below the return on investment over time. Of course, it increases the risks as well. If you get a worse return than expected, profitability can sink, and you can incur losses if you use debt.
This post by SPV Mortgages is intended as a rental housing investment guide. If you want to know more about leverage in real estate investments, in this post the effect of debt on a real estate investment is explained in detail.
I advise against using a lot of debt in this kind of investment because the "cash flow" can be completely eaten up by amortization and interest. We try to generate as much cash flow as possible.
The amortization is not an expense, but to increase the part of the property that is ours, the "equity." But the more free cash flow, the better.
Estimation of Income and expenses
At this point, you should be clear about the type of property you want, the area/s that interests you, and the purchase price range.
Now, it is important that you "soak up" the market for both buying and renting in the neighbourhood where you are interested in investing.
Rental market study
You can analyze the average prices and their trend with free tools or read consulting reports if there are specific ones for that market. Local real estate market and development news is frequently covered in local newspapers.
You must be able to accurately estimate how much property with the characteristics you are looking for would rent for. How? Well, seeing how much they rent similar properties in the same area.
Maybe there is none exactly the same, but if you see a bass and you are not interested in it, yours probably has a slightly higher market rent. Look now for a property for rent, something better than the one you are interested in due to size, floor, qualities, etc. You can even call pretending to be interested in renting, to see if the rental prices are being negotiated in the market at that moment.
It is important to get an idea of how much better apartments are rented for and worse apartments than what you are looking for, to know who you would compete with. You will not be able to rent an apartment if it is above the market price, that is, the price that similar properties are rented in the area.
With the analysis of the rental market, you will be able to estimate the income that the properties that you find that are offered for sale will be able to generate. This is the time to analyse the returns that we talked about at the beginning. Look for properties whose profitability / asset quality equation convinces you.
Cost estimate
Regarding the estimate of expenses, there are properties that are more efficient than others, but to get a quick number, you can start by estimating 15% of expenses. You can even add a month of vacancy or an additional percentage of expenses to take into account a potential vacancy that will exist from time to time.
In any case, when you decide to visit one that suits you, you should ask about all the expenses that it generates from IBI and the community. You can estimate the insurance with the web pages that compare insurance prices, although perhaps you currently have insurance and they can also tell you what it costs in that case.
As I said before, you can estimate 5% for vacuum costs and also some maintenance and repairs; over 4% of the annual rent is reasonable.
The expenses that I estimate when analysing the purchase of entire blocks for institutional investors are usually much higher, because of the types of assets they buy and because of all the professional services that these companies need. Only a "property manager" can charge you 7%-10% of your gross rent (your total income).
Visits to Potential Acquisitions
Once you have the type of property you want, the area/s that interest you and the price range. You have estimated the profitability of some that you find attractive. Those who pass all the filters can visit them.
The visit is very important, ask as much as you can, and be curious. Open cabinets, turn on the thermos and test the hot water, and turn on the TV and the air conditioning. Do the appliances work? If it is empty, has it been inhabited until recently? If it was rented before, for how much?
Ask how much is the community, the IBI, and the insurance (if they have one). Recalculate the profitability with this data. Ask about the community, if they foresee spills if there are defaulters. Are the common areas well maintained?
Make a calculation about the amount of money you have to put into it. Something always has to be bought or fixed. Add it to the price and recalculate the profitability.
The offer
You have a goal that meets all your conditions! Do not be obsessed with it, prepare an offer but with the expectation of continuing to search if the operation does not come out, there are much fish in the water!
If the property is owned by an individual, everything will be faster and cheaper, since agencies usually charge an average of 3% to 5% of the price of the property.
This point is like any other negotiation, if an agency attends you, you can tempt them with questions about what the seller would accept or things like that, but they can still give you ambiguous or untrue answers.
Checks
If the negotiation goes well, in parallel to the offer, you must request an updated simple note from the registry. On a simple note, the registration area, the charges, if you have a mortgage, limitation of community statutes, etc. are verified.
In addition to this, you should make other checks such as checking the cadastral data of the property, checking the payment of the IBI, seeing that there are no pending spills in the community, etc.
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