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The numbers don’t lie! Before you decide to accept your next tenant application take a closer look at their income. Many landlord find themselves in trouble shortly after accepting a tenant into their rental units…mainly because the tenants are financially overextended.

A good rule of thumb is to require that your tenants annual income is at least 40 times the monthly rent. For example, if two roommates are looking at a $3,000 per month apartment, you would require a combined income of $3,000 × 40, which equals $120,000. To determine how much rent you they can afford, simply divide their combined annual incomes by 40.

You might have also heard that you should spend no more than 30% of your annual income on rent.  Spending 30% of your yearly income on rent is believed to be an affordable amount, leaving enough money for all your other expenses. What’s the difference between 30% and 40 times the monthly rent? Absolutely nothing, they’re just two different ways of deriving the same number.  The 40x trick is just easier to calculate.

For example, let’s take $120,000 of income.

  1. 30% of $120,000 = $36,000.
  2. $36,000 ÷ 12 months = $3,000 per month.

But to make the calculation easier, just divide $120,000 by 40.

  1. $120,000 ÷ 40 = $3,000 per month

Again, to determine how much rent your tenants can afford, simply divide your combined annual incomes by 40. Don’t have a calculator handy?  Use the following table to look up your maximum rent.

Gross Annual Income

Max Monthly Rent

$40,000

$1,000

$44,000

$1,100

$48,000

$1,200

$52,000

$1,300

$56,000

$1,400

$60,000

$1,500

$64,000

$1,600

$68,000

$1,700

$72,000

$1,800

$76,000

$1,900

$80,000

$2,000

$84,000

$2,100

$88,000

$2,200

$92,000

$2,300

$96,000

$2,400

$100,000

$2,500

Need help renting one of your units? Contact us! We can help you find qualified tenants….often at no cost to you!

Contact@MandrellCo.com or 617-297-8641

 

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Let’s assume you have two identical multifamily buildings on the same street, in the exact same condition and built in the same year. The tenant quality for both properties is similar and both properties have the same monthly expenses.  The only difference between these two properties is the amount of rental income being generated. Both properties started out with rental income of $3000 ten years ago. The owner of property number one has consistently increased rents to match the rate of inflation and is now achieving $5000 in monthly income.  The owner of property number two has only raised rents a few time during the years and is currently collecting $4000 monthly. He’s always felt as if he didn’t need the extra funds to cover expenses then why be greedy and bother his tenants.

 Both property owners are now looking to retire soon and considering selling their investments. Both owners speak with the same real estate agent and try to determine an appropriate selling price for the buildings. The owner of property number one was given a likely sales price of $500,000 based the numbers he provided the agent. Owner number two was provide a potential selling price of $400,000 based on the numbers he provide the agent.

There is a 20% different between the $500,000 that owner two received and the $400,000 that owner two received. There is also this exact same 20% difference in the rental income they are achieving!

Nothing affects the value of rental real estate more than its rental income. It sounds obvious but not everyone fully understand how underachieving on your rentals can affect your investment long-term. In the above (very close to real life) scenario, both owners ended up selling their investments for very close to what their agent quoted them. From her consistent attention to local rental rates and steady trend upward in what she charged, the owner of property number one was able to achieve close to $75,000 more than property owner number two. Owner number two was able to achieve a better than expected sales price ($426) partially because the buyers saw potential to increase rents after purchase and get the property back to achieving at its highest point.    

 Note: not only did the first owner retire $75,000 richer…she also achieved roughly $20,000 in additional rental over the 10 year span they both owned their properties.  

$3000 Initial Rental Income * Annual Inflation Rate: 5.5%  

Year 1 : 3169.22

 Year 2 : 3347.99

 Year 3 : 3536.84

Year  4 : 3736.35

 Year 5 : 3947.11

 Year 6 : 4169.75

 Year 7 : 4404.96

 Year 8 : 4653.44

 Year 9 : 4915.93

Year 10 : 5193.22

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Are you considering selling your multifamily property? If so, you should know there are two types of buyers for your property and they differ in how they approach a purchase. The first potential buyer would be the owner occupant buyer. This person plans to move into the property after purchase and use the home as his primary residence. The 2nd buyer is the investor. The investor is buying your property for investment purposes and will likely keep your current tenants or rent the property to new tenants.  As a multifamily seller it’s important to understand the differing mindsets and resources of these potential buyers. Understanding their wants and needs will allow you to better prepare for the sale and maximize your price received. Let’s take a look at both buyers in further detail.

Owner Occupied Buyers:

  • This buyer plans to purchase your property as their primary residence tends to be a bit more emotional in their decision making.  This can be good or bad for you. If your property shows well and seems to attract lots of attention during initial showings, buyers may jump to make the purchase before someone else does and ultimately pay more than they would have without the appearance of competition. The opposite is possible as well. If your property doesn’t receive much attention, this buyer will automatically assume “if no one else is interested, there must be something wrong that I’m not seeing”.
  • Owner occupant buyers will obviously need a vacant unit at the time of closing. If you have all tenants on long-term leases you will not be able to secure this type of buyer.  Some owners prefer to wait until there is a vacancy within one of the unit before they put the property up for sale.
  • Owner occupant buyers tend to pay more than investors. Their purchase is more about whether the property suits their particular needs and less about cash flow numbers. Owner occupant can often receive better financing at lower rates than the typical investor. This is another factor contributing to their ability to pay a higher price for the same property.

Investor Buyers:

  • Real Estate investors tend to be less emotional in their decision making. They are buying your property for investment purposes and the financial must make sense for them to make a move. A good investor would rather miss a good deal than to buy a bad one.
  • Investors are looking at your properties cash flow and return on investment. To land a good investor for your property you will want to show that you are achieving market or above market rents for the area and that your expenses are relatively low compared to other investment properties. It’s a good idea to keep strict records while you own the property so you are able to show these to potential investors at time of sale.
  •  Investor buyers can often buy your property “As Is” and can close quickly compared to owner occupied buyer.  If you have a property in need of heavy work, it may not qualify for owner occupied loan programs. In this case you will need an investor to step in and buy the property. Investors also have money that is more readily available allowing them to close on your property on a short timeline.

Interested in selling your home or investment property? Call us today at 617-297-8641.

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One of the best things you can do as a new real estate investor in walk up and down the aisles of home supply stores like Home Depot & Lowes. Not that you want to be swinging a hammer on a job site, but there’s simply no better way to educated yourself on the cost for home repairs and upgrades. The knowledge you gain from this task will help you understand:

  1. The cost of construction materials and how easy or difficult a particular job may be. This will allows you to be better equipped you are when evaluating a particular property purchase. 
  2. How to negotiate with contractors for a particular job. For example, I know that if a contractor is quoting me $500 to replace a standard vinyl window, his labor must be between $250 – $300. I know this because and I can buy a standard vinyl window at HD for $200-$250. Now I can decide whether my contractors labor is worth what he’s asking, negotiate his price or gather other contractor quotes.
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