People have many questions in regard to the real estate business. And, because there are so many, this is going to be four-part article that will address many frequently asked questions folks tend to have. This is the second article, and it covers three more questions people will ask.
There’s A Great Condominium I’d Like To Rent Out, and It Costs Next To Nothing. Do You Think There’s A Catch?
Here’s a good saying to remember: if a deal is too good to be true, chances are it is! Here are some things you need to know:
• Condominiums don’t usually make a lot of rent to cover the financing expenses and operating costs. This typically leads to homeowner’s association fees.
• You may be subjected to higher HOA real estate ownership fees, possibly even a special assessment.
• Many condominium associations limit how many units can be available for rent. They generally need at least 50 percent of the owner-occupied units to meet Federal Housing Administration financing rules. And, some places won’t even allow for rentals.
Keep in mind that if a homeowner’s association allows for renting, rules can change. Be sure you do your research before you do anything.
What’s The Deal With The 50 Percent Rule When It Comes To Real Estate Investing?
The 50 percent rule is applied when looking at potential rental properties. It’s useful in a variety of ways but needs to be just a guideline and not an alternative to real estate analysis. This rules stipulates that an average landlord needs to spend about 50 percent of the gross income on the building operating expenses, which is not finance-related. This can mean the following things:
• Utilities (if landlord pays them)
• Landscaping (if landlord pays them)
• Professional services
The reality is that your operating expenses could exceed this number, depending on where the property is at. If you have money left over, this is known as your operating income, which pays for the financing charges. And, anything left over from that is your cash flow or net income.
What’s The Deal With The Two Percent Rule In Real Estate Investing?
This two percent rule is an outdated rule, but stipulates that a worthwhile real estate purchase is one where the gross monthly rental income is two percent of the purchase price. It’s mainly applied in lower-end property, small rental units or where working-class areas are out Midwest, Atlanta and the like.
For instance: if you try to buy a $3 million duplex in New York City, and wanted to apply the two percent rule, you’d need to may $60,000 a month. You can’t do that! So, the better option out of both the two percent and 50 percent rules is to do an analysis of the transaction and forgo them entire.
Originally posted on Felix Sater‘s website.