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All posts tagged income

Recently we hosted a webinar on the topic of Building Wealth In Your 20’s & 30’s. In the third and final section of the webinar we covered building equity, tax savings and some very important closing thoughts.

For more resources and tips on how to build wealth, please contact us.

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Recently we hosted a webinar on the topic of Building Wealth In Your 20’s & 30’s. In the second section of the webinar we covered saving for retirement, the importance of life insurance and the different types of investments.

For more resources and tips on how to build wealth, please do not hesitate to contact us.

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Recently we hosted a webinar on the topic of Building Wealth In Your 20’s & 30’s. In the first section of the webinar we covered the importance of creating a budget for yourself and family, establishing personal finance goals and how to figure out, and improve on your credit.

For more resources and tips on how to build wealth, please do not hesitate to contact us. 

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Tenant screening can be one of the most important aspects to owning rental property. The more due diligence you preform in this area will only lead to a more stress free future when managing your property. So first, what are some qualities that make up a great tenant?

Qualities:
Ability to afford rent – not just the rent, but look for the applicant’s income from their job to be at LEAST 3x the monthly rent.
Stability of housing – look for renters that have lived somewhere for more than a few months at a time. Finding those who have rented for at least a year are most desirable.
Cleanliness – it would be best to desire someone that will appreciate the quality of apartment you are providing them and know that they are going to take care of the unit as you would. A neat trick that you can do is to take a peak inside the applicant’s car. This can often times be a good indicator as to how people treat their own possessions.
Pays rent on time – this one could be argued both ways, (opportunity to collect a late fee) but the issue here is the tenants are more likely to stop paying altogether in the long run. Ultimately this just creates more stress than is worth your time.

Here are a few things that you should be looking for in each applicant and if they do not meet these standards, should lead to a denial.

What I would call “absolutes.”
Income greater than 3x monthly rent
Good references
No evictions EVER
Clean background

As a reminder, never discriminate against race, color, national origin, religion, sex, family status or handicap as these are all protected classes according to Fair Housing Laws. You should also check up on State and Local Fair Housing Laws to further ensure you have doing everything within your legal right.

To truly succeed in being a landlord, treat it like a business. And this is one of the most important parts of your business. Do your due diligence, be consistent in your screening and always, always stay true to your screening guidelines.

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Cash Flow

Cash Flow by definition is the total amount of money being transferred into and out of a business, especially as affecting liquidity. In real estate investing, what this means is:

Total Income – Total Expenses = Cash Flow

While you would assume total income would consist of just rent, make sure to include other potential sources of income including application fees, late fees and laundry income. If these sources are possible, also make sure to estimate your numbers using a conservative approach. In the long run this will be the most beneficial approach. On the flip side, your total expenses are NOT simply your mortgage, property taxes and insurance. Other expenses that cannot be overstated include utilities, potential flood insurance, repairs, vacancy, property management and capital expenditures. The last three expenses can be used as percentages against your monthly income from the property. Failure to include ALL possible expenses could lead to you purchasing a “deal” that actually turns out to be no deal at all.

Depreciation/Appreciation

Once you have purchased a property and become a landlord, it is to stay up to date with the value of your property and identify whether appreciation or depreciation has taken place. While this is very important post purchase, factoring in appreciation for an investment decision is speculative in nature and brings unneeded risk into the situation. In the event that your property has depreciated over time, there may be significant tax advantages to this and those same advantages may even be available to you if your property has appreciated over time.

Net Operating Income

Net Operating Income by definition equals all revenue from the property minus all reasonably necessary operating expenses. To look at this simply, NOI is calculated on a monthly basis using monthly income and expense data, therefore it can be converted to annual data just by multiplying by 12. The important thing to remember with NOI is that the formula does not include debt service costs, (loan costs) which differs from cash flow. One of the biggest reasons a landlord will want to know this number is because Net Operating Income plays a huge role in determining the value of your property. For this reason, it is in your best interest to work towards maximizing this number using different strategies to accomplish this.

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Another topic that we covered in our sit down with Anastasia Tacewicz from GMH Mortgage Services was the process of purchasing a condo vs. a single family and how the two differ. For those potentially in the process of looking at both options right now, there is some good information in this video from the perspective of someone who would actually be involved with you when considering your purchase.

Need more info about mortgages or about getting pre approved? Contact us at 617-297-8641

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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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I wrote a post a last week about building long-term wealth and had a few readers respond with questions. You can view the post with the following link. (http://mandrellco.com/building-long-term-wealth-real-estate/) One of the questions I received was concerning how to quickly calculate a property’s cash flow and expenses, … so I wanted to share the form I use to accomplish this. You can download the form below and I’ve also provided some quick notes on a few of the forms line items.                

 Note: The attached form uses annual amounts but I will use monthly figures for my examples

Total Gross Income:   Gross income is the total amount of income the property is producing. This will include income from rents, laundry, storage, parking, and any other sources connected to the property.

Vacancy Allowance: It’s assumed that your property will not stay occupied 100% of the year. People will move out and new people will come in. Vacancy allowance is the estimated portion of the year where you do not have a tenant paying you rent. I did not include vacancy allowance in the example from my previous post to avoid making calculation more difficult than needed. If we had included vacancy allowance I would have used the national average rate of 8% and multiplied that with my gross income of $4500.

Effective Gross Income: Effective Gross is Total Gross Income minus Vacancy Allowance ($4500 – $360=$4140)  

Net Operating Income:  NOI is simply your Effective Gross Income minus your Total Expenses.

Debt Service: Your debt service is your total monthly principal and interest payments on your mortgage. Many times borrowers chose to combine (escrow in) their taxes and insurance, while this cash flow sheet breaks these expenses into separate categories. The reason this is done is because your mortgage is a “variable expense” so to speak. If one investors puts down 20% and finances the property over 15 years and another investors places down 3.5% and finances it over 30 years, their payments will be complete different. Taxes and insurance will not vary from investor to investor, so they must be removed and shown in their own expense category to get total picture of what the investments true expenses are.  

Hope this helps!

Free Cash Flow Analysis Form

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