Evaluating and purchasing rental properties can be a solid investment strategy that yields growth, equity, and monthly cash flow, especially in the Fresno and Clovis area. Sometimes it isn’t as simple as putting down 10% and watching the money flow in. Rental properties require a lot of maintenance and consideration.
You’ll want to be sure you’ve done the math on everything from operating expenses to mortgage rates and how easy it’ll be to fill vacancies. You’ll need to consider things like the real estate location, the renting market, and what your finances look like beforehand. We’ll take a look at what it takes to purchase a rental property and what this might mean for you.
2 Ways Fresno Area Rental Properties Bring In Money
There are two primary ways rental properties can make money. There’s income from renting—the monthly rent payments you’ll receive when you rent them out, and equity, which can increase over time as the home’s value increases with the market.
Equity can be more difficult to predict since the market is always changing. You can never know for certain what a home’s market value will be one year after the next. Rent income is easier to predict, but you’ll still need to consider how long you can afford vacancies. you’ll also need to know what the market is doing and how that’ll affect the price of rent, and how easy it is to fill a vacancy.
Doing The Math On A Property: What’s Involved
You’ll need to consider a lot of factors before you start making offers on a potential rental property. This will include the cost of a mortgage if you’re not buying outright, the cost it’ll take to maintain the property, the rates on a mortgage, and how you’ll be able to financially weather potential vacancies.
You’ll also need to consider how likely vacancies are and if the market you’re looking at is hot for rentals at the moment. Unlike a mortgage on a home you’ll live in, you’ll also need to look for ways to keep rates and terms favorable for renting.
Mortgage Rates And Terms
Your rates and terms will be especially important on a rental property. In general, investment properties tend to have higher interest rates. There’s a good reason for this; lenders are concerned first and foremost with potential defaults on a loan, and it’s not a stretch to imagine that people will be more likely to cling tightly if they’re currently living in a home. It’s not too hard to imagine, right? Many people will do everything in their power to avoid losing their home, while an investment is just that—an investment. Expect to see interest rates on investment properties be between a half and whole percent higher than residential purchases.
If you’re looking at a property for renting, you also might want to think about making a hefty down payment. Making a larger down payment will put you in higher equity and ease lenders’ concerns. This will make it possible to secure lower rates and better terms, and, if you put less than 20% down, you’ll almost always be required to also invest in PMI or private mortgage insurance. This will add to your list of expenses and detract from the total amount you’re taking in on a property each year.
You’ll also want to carefully plan out acceptable terms on a mortgage for a rental property. While it’s not uncommon to get into a 30-year mortgage on investment property, opting for a 15-year mortgage, for instance, might allow you to ramp up returns much sooner, which if you’re retiring could be extremely helpful.
Monthly And Yearly Expenses
Each month, you’ll need to make sure that utilities, taxes, and mortgage payments are made. As a property owner, you’ll also be responsible for maintenance on the property, and if you hire a property manager, you’ll be responsible for paying them. It’s important to carefully consider these recurring expenses against the total amount you’re expecting to take in from rent, how long you’ll be able to afford a vacancy, and how you expect to see the equity in a property rise over time.
Cash Flow From Rent
Considering your potential cash flow is crucial in evaluating a rental property’s viability as an investment, particularly in the short term. Once you’ve figured out what your expenses are going to look like on a property, you’ll be able to compare that to what you’ll need to get returns on your property. Then, you can look at the local market and figure out what you’ll be able to set the rent at and determine if this will be a viable investment.
The market can be hard to predict. If you’re looking at long-term investment in a property, though, you’ll want to at least consider how the home’s total market value and your equity are likely to change throughout your mortgage. This might be less important if you’re planning to rely on rental income. Eventually, if you’re holding an asset like a rental property, you may decide to sell it after it’s paid off. In general, real estate tends to trend up in value over time, but each location is different.
Putting It All Together
Once you’ve put together projections for your yearly expenses, cash coming in on a property, how the property might value over time, and what rent is going for in the area, you can start to cross-reference everything and make sure that a piece of property is likely to be a viable investment both long and short term. Now, you’ll be able to determine an estimate of your NOI or Net Operating Income. In short, this is the amount you’ll be bringing in over a year minus the costs it will take you to maintain the property. This will be your revenue minus your operating expenses.
Remember, these can include mortgage payments, maintenance, management, taxes, utilities, repairs, and insurance. You’ll also need to take a serious look at what you’ll do with vacancies. If you can’t afford to go a few months without rental income, you can be looking at serious losses. Nobody can control the market, so it’s really important to handle potential vacancies.
Attaining The Right Property
If you’ve done the math and you know what you’ll need to make an investment property viable to rent, you’ll also need to know what you can afford. You’ll need to take a close look at your finances and make sure that you’re up on some very important metrics for lenders when it comes to securing a favorable mortgage. Even if you’re buying outright, you’ll need to know if the property will be easy to find renters for. As far as your finances go, you’ll need to have a good handle on the following metrics:
- DTI ratio, or your debt-to-income ratio. This is the amount you’re taking in each month, against how much you’re paying in debts each month.
- Your credit score. This is a cumulation of your borrowing history, payments, debts, and general reliability as a borrower.
- Existing assets and liabilities. These, in short, are things you own, and things you owe on. Lenders will want to know about both.
Investing in a rental property in the Fresno or Clovis area can be a great investment strategy. If you plan it out carefully, are honest with yourself about your finances, and have access to real estate in a hot rental market, you can see some serious returns on an investment property that you’re renting. But, you’ll need to do some careful math, and take a lot of factors into consideration before you start applying for loans and drafting up rental agreements.
You’ll need to consider how much you’ll need to spend in a year, how much you’ll be able to take in, what your rates and terms will look like, and if you can afford to cover vacancies. But, if you’ve done the math, and you’ve found a solid NOI number on a viable property, you can make a solid investment in rental property!