Hello BP, I am a novice investor and was intrigued by the idea of becoming a landlord. I see that you could make good money in this particular field but I had one obstacle that I simply don't understand. For example lets say you buy a single family house and the mortgage is $600/month and you rent it out for $1000/ month. So now you'll say wow $400/month positive cash flow!!! But the only thing now is that you have to pay for property taxes. Lets say in the area for your house, the property taxes are $5,000 a year. That now leaves you with a -200/month cash flow. I simply just don't understand how one can make money on a property when property taxes are more than your rental income profit. If anyone could please help, I would like some advice or guidance on how abouts to fix this problem. Thanks
Also, I meant -$200 for the year not monthly.
hello @Dom Lombardo ,
Normally your property tax is included in mortgage payments if you have a mortgage. For example my New Jersey house property taxes are $4700 a year with a mortgage balance of $220k and monthly mortgage payment of $1560. I am renting it out at $1600. I know $40 cash flow isn't attractive but before I was adding $500 on top of rent to make mortgage payment. This is the first home my wife and I purchased at the height of bubble and now upside down. We were able to refinance which lowered our mortgage payments $500.
Basically when looking at properties you want to account for all expenses; mortgage payment, property taxes, homeowners ect. So make sure the rent will cover all expenses and leave you with with a few hundred a month in cash flow.
Account for everything; PITI (principle,interest, taxes, and insurance), HOA (if applicable), 10% for property management and always add in a 10% loss due to vacancy. You hope to not have a vacancy but it's better to factor it in JIC. You also need to factor in that you will have to pay some money up front for some cosmetic work. Turn keys are rarely that because they always need something when the seller moves out. Fresh paint, cleaning, etc..
There are many ways to find out if a place is profitable. Things like ROI, Cap rate, etc... just need to find what works best for you and your area.
@Dom Lombardo you are right many properties simply do not make sense as rentals. The rent will not cover various expenses and the mortgage payment.
The key is to by better deals, or perhaps properties in a different area. You will find there are a LOT more expenses than just taxes. There are many things new investors do not think about; Maintenance, licenses, accounting costs, vacancy, management fees, re-rent repairs, Capital reserves for longer term expenses like roofs, water heaters, and appliances.
So again I say, do better deals. Plan all these costs up front and find properties that still make money. Keep reading here on BP and you will start to learn how to find these deals
Good luck - Ned
I invest in Pennsylvania. I TRIED to invest in western New York. Taxes in New York were so high that I would never have been able to make a cash flow in the area in which I was looking. I'm talking twice as much in taxes per month than in principle, interest, and insurance put together.
Sometimes your area may be the problem when it comes to taxes or other expenses that are beyond your control.
As was said, you have to account for EVERYTHING including CAPEX.
If you cannot cash flow what you are looking at, then you have paid too much for it or you are charging too little rent.
In my opinion, when a state imposes high taxes on its citizens, it deserves to have its property values plummet in order to maintain fiscal sense.
I like to use this site for its calculator to give an initial big picture of a possible investment. It'll help clear up your confusion with the cash flow needed.
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