An Objective Approach to Value

 Buying with an objective eye when purchasing income property is essential. You cannot afford to fall in love with a property if it does not benefit you after you buy it. Always use a financial analysis on the property to determine whether you can afford to own the property you are interested in.  

The one method of analysis income property is to utilize a Gross Operating Income Statement.  This is a statement that will help determine a property’s net income after all expenses are paid.  If the property you are analyzing does not generate enough net income to pay the mortgage payments and generate some extra available cash flow than you should not buy it.

Be realistic when structuring and analyzing any debt.  Develop a debt service structure that can be satisfied by the property’s cash flow.  Determine a monthly mortgage payments with an amortization calculator or mortgage factor chart. Remember if the net operating  income does not cover the total debt service than you have a negative cash flow.  Negative cash flow means you will have to come up with the extra cash out of your pocket.  If this is the case, than you  must ask yourself as an investor  ”is it worth it” for me or more importantly, can I afford to supplement the investment each month  until  the property produces an income.

By taking a hard look at the gross operating income  statement and analyzing the property to see if it can service the debt, you can buy according to your individual needs and assets and know objectively if you can afford it!

Converting Your Property to Produce Income

           Should you consider planning on converting your home to generate additional income? In slow times, the additional income can help to cover your mortgage or household expenses. 

 The first thing to consider before converting is- Is it legally permissable? Check with local zoning boards first to see if approval is needed to convert a portion of your home to an “accessory dwelling unit” or apartment.  

Ignoring local zoning rules can be costly and the penalties of putting in an illegal apartment can negate the future possible income.  If your home is in a community with a property owners association, you should also check with them as some private subdivisions may have restrictions even if the city or county does not.

Is it practical and feasible to convert the property to an apartment unit? Homes that have a hillside walk out basement tend to  be more practical to convert then a second story which may need additional plumbing and electric for an upstairs kitchen and the cost of a making a separate entrance.

Would be landlords should also ask themselves if they are willing to give up some of their privacy, as some units may share common walls or areas such as stairways or hallways. Tennant will likely use a common driveway and some additional site work may be necessary for adequate parking.

Owners should be aware of what units similar in size and utility are leasing for and if there is an adequate demand in their area.  If the rental market is slow, you may need to reduce your price at first to attract long term renters.  Realtors that offer property management are very knowledgeable about their local market and may be able to help you determine what features are desired by tenants and what your unit should rent for.

 

 

Sources:

Hot Springs Appraisal Services,  May 2010

Realtors Magazine, February 2010