@Casey Ram I can tell the followings that I feel like they are the important bits. Not sure if these are details/comprehensive enough as I am still a beginner. For experts here, please correct me if I am wrong or fill in more info if there are other importance detail.
1) Calculate the cost to get the purchase done. From the property value/asking price, break it down to 2 numbers
- Downpayment.
- Loan amount or remainder (asking price - downpayment)
The downpayment is the major upfront cash that that need to be paid to get the purchase done. Often 20% from the asking price. There are other costs (e.g. appraisal, inspections) needed for the closing which accumulate upto 3-5% from the asking price. The loan amount are used to calculate mortgage payment.
2) Calculate the monthly costs to maintain the property. The main source of income is the rent from a tenant. The cost come from 4 major sources, namely, Mortgage, property management + maintenance, home insurance, and property tax.
Mortgage: From the loan amount/remainder, calculate monthly payment across the loan term/period (often 30 year/360 months.) Try Google "loan amount to monthly payments" for the calculator. This will be amount that we supposed to pay.
Management + maintenance: This cost take ~20% from the rent (~10% for management ~10% save for any repair). These can be reduced if one chose to self-manage and/or have any maintenance deals.
insurance: This number depends on the insurance company and the property condition. The monthly cost is ~5% (this may change due to current uncertainty in politics and supply changes).
Tax: this depends on states and property value. This is obtained as the percentage from the tax-appraised property value and tax rate from that value. One's can also find estimates from Zillow. Once get the number (often in annual amount), calculate into monthly.
3) Calculate the gain from the property. The gain come from 2 sources, namely, price appreciation and cashflow.
price appreciation: often calculate as annual percentage increase from the purchase price. This percent can fluctuate but increase steadily considering over long-term period.
cashflow: amount of cash gain after all the other cost are paid off. The usual estimation is cashflow = rent - mortgage - (management + maintenance) - insurance - tax
4) Consider whether one want this property from the above info. This come from multiple ideas the following are considerations that I personally encountered before making decision.
-Strategy perspective: this depends on the objectives of our investment. In my case, me and my brother want to build equity for long-term on this property without having to lose cash to maintain it over time. This translated to purchase with downpayment small enough break even the cost of maintaining ownership. But pay the downpayment large enough to have small positive cashflow saved for big expense in the future (e.g. replace the HVAC, etc.) From my own estimation, I will gain only ~300 $/month in cashflow but will get ~84k$ after 5 years from the appreciation (estimated from 5% annual growth from) from the upfront of cash invested. There can be other strategy that may have different focus (e.g. maximize cashflow, maximize gain before sell after some years before fliping, etc.)
-Upfront cash perspective: we consider tradeoff between high downpayment vs high loan amount. Paying high downpayment will lower the monthly debt payment in the long runs. Low upfront cash mean higher monthly payment which limits cashflow and ability to spend on other things.
-Debt-to-income perspective: we consider that we don't want the monthly debt to reach more than certain percent compared monthly income. This consideration would affect the amount of downpayment and whether we want to buy other property after certain period in the near future.
- Growth/risk perspective: As many may notice the calculate above leave out future prospective including rent growth, increase in maintenance/insurance/tax, etc. I don't have a good way to estimate these. In this investment, I assume that the rent grows faster than maintenance. To maintain this assumption, I only select property in the neighbor with low crime, with decent job growth prospectives, and in the state that have low property tax.
- Uncertainty perspective: the calculation above also doesn't include major events such as natural disaster, vacancy, eviction, CapEx, political suitations, etc. I assume that some of these events can be avoided for next 5 year which should be long enough to make certain of whether we want to sell the property at some point. To maintain this assumption, we ask for contingency that we can back off from the deal if HVAC is old or the roof have remaining life less than 5 years. I also choose the current turnkey provider because they work with managements that have tenant in place for 2-year lease term nave high renewal rate.
I welcome any suggestions and comments. Glad that I can share this perspective and learn from the experts here.
