HomeSmart, Evergreen Realty
Frank Velasco, HomeSmart, Evergreen RealtyPhone: (714) 478-8747
Email: [email protected]

How Quickly is Investment Property Profitable?

by Frank Velasco 02/09/2020

Photo by Mohamed Hassan via Pixabay

Buying property is a long-term investment. If you’re looking to make quick income from property, the only way is to buy low and sell high with minimal input for remodeling, upgrades, or even paint. However, if you intend to keep your property as a rental here are a few of the basics to make it profitable sooner.

Show Me the Numbers

Say you buy a house for $300,000. To get a loan for an investment property you’ll need a minimum of 20% down; so in our scenario, that’s $60,000. Closing costs depend on so many things that even an estimate is difficult, but rule of thumb is three to four percent of the purchase prices. Go with an even $10,000 to keep the numbers easy. You’re out-of-pocket $70,000 by this point.

The mortgage is for the remaining $240,000, so a 30-year fixed rate at 4.5 percent makes your principal and interest payments about $1,200 per month. Add to that property taxes of about $6,000 per year, or $500 per month, and homeowner’s insurance for about $150 gives you a monthly payment of $1,850. If you have an HOA, that might be an additional $50 per month. That’s $1900 for the basics, every month.

These numbers do not factor in upgrades, changes, paint, flooring, appliances or anything else, so remember that those items eat away at your profit too.Say that you rent it for $2,500 per month. That gives you a $600 difference. From that amount comes management fees if you pay someone to manage it for you. It also pays for lawn care unless you turn that over to the renter. Plus, for every month it goes unrented between renters, you carry the entire amount. 

Positive Cash Flow

You decide to manage it yourself and have the tenant take care of the lawn. Presuming no major systems require repair during the first year and you rent it within a month, you receive $27,500 ($2,500 x 11) in rent. You pay out $22,800 ($1,900 x 12) leaving you with $4,700 positive cash flow.

Assuming you never have to spend anything on repairs, maintenance, increases in taxes or refurbishing between tenants, it will take you 12 years and nine months to make back your down payment. Of course, if you raise the rent every year or so, you’ll shorten the time to repay the down payment, but you may lose more tenants.

Is It Worth It?

Yes! After year 12, your profits increase. But only if you follow these guidelines:

  • Do buy in a nice, livable area where people want to rent.
  • Don’t overspend for the property.
  • Avoid frivolous upgrades with low R.O.I.
  • Vet your tenants.
  • Remove tenants that damage property or don’t pay rent.Use a property management and marketing service to reduce unrented months.
  • Know the property owner and tenant laws in your municipality. 

Some properties are more profitable than others or are profitable sooner. Your investment real estate professional knows the difference and can help you choose the right property for your investment situation. If you want to invest in real estate, let your professional agent guide you.

About the Author
Author

Frank Velasco

With over 20 years of experience in the Real Estate Industry, 10 of which were directly working for a

Mortgage Lender, Servicer, Title Insurance Company, and Escrow Company. Well rounded in

knowledge and experience of the complete transaction from start to finish. The purchase or sale of a

home for most people is the biggest investment or sale that they will make in their lifetime; my

knowledge in Finance and Accounting is an added plus to my clients. I am a Real Estate Consultant, not

just a Real Estate Agent. Committed to providing the best service possible. With a complete team of

professionals working for you. Serving the Orange County Area, specializing in the City of Tustin,

Orange, and Irvine. I take my designation as a Realtor very seriously and uphold its professional

integrity standards to its fullest.

Using the latest technology allows my team and me to provide you with the latest up to date Real Estate

Market information. Providing professional, personalized service allowing for a successful Real Estate

transaction.

In the 36 years of living in the Orange County area, I have seen not only the growth of the Orange

County Real Estate market, but also the change in one of the greatest areas to live in the country.

Whether your planning on buying, selling, or have a question feel free to contact me.

Affiliations:

 National Association of Realtors (NAR)

 California Association of Realtors (CAR)

 Pacific West Association of Realtors (PWR)

 National Association of Hispanic Real Estate Professional (NAHREP)

 B.S. Accounting (SDSU)