How Quickly is Investment Property Profitable?

by Diana Lucivero, CRS 01/11/2021

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

Diana Lucivero, CRS

  

A top-performing agent, Diana's integrity, work ethic, and enthusiasm which are grounded in a corporate sales discipline and hospitality industry background, quickly established her a reputation in the Cape Cod residential real estate market for routinely going above and beyond to exceed her clients’ expectations. Her keen analytical skills have been invaluable in guiding and advising her clients regarding the pricing and marketing of their properties.

She joined Compass after more than three decades in positions with Starwood Hotels and Resorts, Boston College Law School, and major realty firms in Cape Cod and West Palm Beach.

Professionally, Diana is a member of the National Association of Realtors and has earned its Certified Residential Specialist (CRS) designation. She is also a Certified Luxury Estate Advisor (LEA). Diana is a member of the National Association of Realtors®, Massachusetts Association of Realtors®, Cape and Islands Association of Realtors®. 

Diana's passion for the military is evident with her philanthropic efforts supporting The Fisher House, Wreaths Across America and Tunnels to Towers and she takes great joy in volunteering in support of military families throughout the area.

Diana lives in Falmouth with her husband Jim. They have two children, a son who is a West Point Graduate, Officer and Green Beret in the Army and a daughter, a Boston University graduate who is a sports reporter for NBC.

In her free time Diana enjoys tennis, pickle ball, golf, snowboarding, cooking and spending time with family and friends.