Regular income that you earn from the rent you charge on your investment property is a key source of profit when investing in real estate. Regular monthly income should be your primary objective when acquiring an income property. Positive income on a monthly basis is essential to maintaining your investment and having the investment remain financially viable. You do not, repeat do not, want to be in a situation where you have to come up with money out of pocket every month to pay expenses (mortgage, insurance, etc). Occasionally, this condition will be unavoidable. For example, when you are advertising your property to find a tenant you will have no income. This should be a temporary condition that is rectified when a tenant moves in.
How much income is enough? This is a question that you have to answer based on your individual situation. What will be acceptable for you, a 5% return on investment, or 10%? Or to look at it another way, would you be happy earning $100 a month, or $250 per month. It is up to you. You can calculate your potential return by taking your anticipated monthly rental income and subtracting out your monthly expenses.
A hypothetical situation below:
$800 monthly rental income. Then subtract each of the items below:
- $300 mortgage
- $100 property manager fee
- $100 property insurance
- $75 association dues
- $75 property tax
=$150 net monthly income.
Now assume this scenario involved you purchasing a $90,000 house with an $18,000 down payment, you would be looking at an annual return of 10% on your $18,000 investment. Not a bad result. Do not forget that the mortgage payment that is identified above also involves paying down principal, increasing your return and paying off your mortgage. While a take home amount of $150 a month may not seem like a significant amount, it does represent a very good return on the original investment. It is also a very consistent investment, each month you have a tenant you know you will receive this amount as your return. Additionally, by signing a lease with your tenant, you know you will have a consistent return for at least a year. Hard to beat that.
My first investment property rented for $645 a month. After expenses I would net $125 a month. Again, this is not a huge amount of money, but it does represent a positive return each month and an 18.75% annual return on my original $8,000 down payment for the property. Let’s see a hedge fund manager beat that annual return on a consistent basis. Assuming you could find a hedge fund that would let you invest with only $8,000.