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Buying an investment property can be a great way to generate additional income and build wealth.  However, purchasing an investment property requires an understanding of the operational part of being a landlord, the risks associated as well as a sizeable down payment. 

Here are some important considerations when purchasing an investment property:

• Cash Flow: Cash flow can be summarized as rental income minus expenses (including your mortgage payment). 
• Vacancy: While a property may be fully occupied today, that may not always be the case. To compensate for that future vacancy, a vacancy rate is typically applied to gross rents to account for future vacancies. 
• Taxes: Taxes are likely to be the largest single expense (aside from your mortgage payment) for any rental property.  It’s important to understand how your property value is currently assessed and the tax bills are calculated. A sharp increase in taxes could cut your profits significantly.
• Property Management:  People sometimes think that if they plan to manage a property themselves, they shouldn’t include a management fee. While some choose this approach, it’s important to understand that a whether you plan to manage a property yourself or hire a property manager, the time and effort required to manage a property is not simply passive activity. Therefore, it should be seen by investors as being separate from income acquired from making an investment.
• Insurance: Often, insurance is put in place right before closing. Insurance costs have been rising nationally, so getting quotes early in the buying process can help to ensure your cash flow projections are accurate.  
• Repairs and Reserves:  Typically, these numbers are broken out separately, but the idea remains the same.  You will ultimately need to make repairs to your property both to keep your tenants happy and to maintain your investment. Repairs are intended to be regular expenses (e.g., repairing plumbing or electrical issues, fixing a doorknob, replacing a light fixture, etc.) while reserves are for a big-ticket repairs at some unknown time in the future (e.g., a new furnace, hot water heater, roof, etc.).

While the above is not an exhaustive list of the many considerations that go into forecasting cash flow, these are areas that investors should consider when looking at an opportunity. Lenders will have their own underwriting standards as well and could be a good resource for how to quantify these line items. 

If you’re interested in discussing these or other considerations, reach out to the CCU Commercial Lending team to learn more at 847-672-1888, or email [email protected].