Let’s do the Maths on why property rentals are such a good idea!

By doing the maths on why property rentals are such a good idea,  I hope you will gain a better understanding as to why people invest in rental property and get excited about owning a rental property portfolio!

Currently, the  economic downturn has placed many homeowners and potential homeowners in difficult financial situations.

Homeowners

Many are faced with mortgage payments they cannot afford whilst living in a property that has not fallen in value,  but plummeted in value!  It is unfortunate when this situation occurs and there is a lot of stress and worry in trying to deal with this difficult  situation whilst carrying on with “normal life”.

Unfortunately for some,  and fortunately for others, “one man’s problems becomes another man’s opportunity!”

Have to sell

You find that some homeowners are left with no choice than to sell their home or flat  at a low price just to get the burden of payment removed from their finances.

In some cases, properties are also being repossessed and sold at auction or at very low prices just to let the lender get the “bad debt”  of an unpaid mortgage off their books.

Opportunity presents itself

This is the opportunity that is presenting itself to property investors all over the world. The “credit crunch” has had a worldwide effect on property ownership and property values,  resulting in properties being sold at prices which make investment via property entrepreneur a viable proposal.

Potential homeowners

People in this category are people who are currently renting, and up until recently, were considering buying property and becoming property owners.

Banks have closed the doors!

Sadly, one of the major impacts of the economic downturn has been the complete reluctance by banks to lend money with out the security of a hefty deposit.

Many people do not have the deposit at present and cannot save towards the deposit because of the difficult job market and the uncertainty of regular employment.

Happy renting

Another reason is the fact that an increasing number of people across the world are now deciding that they are happy renting long term and have no wish to buy.

The reasons for this are many,  but include the fact that people are more inclined to consider “material” items,  combined with wanting to have a  greater amount of quality recreation time.

This overrides  the need or desire  to actually own a property outright (via the bank!)

Knock on effect

The number of properties available for renting on a worldwide scale is most definitely not increasing at the rate of people who are now coming into the rental market.

The resulting outcome

Less properties for rent + more people looking to rent = increased demand for rental properties.

I felt it was important to explain the above before putting numbers into this article … now we have the bare bones of why the property rental market is attractive,  let’s add some meat with figures and sums.

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Sharpen your pencils!

If you are in the fortunate position of having deposit monies available you are in the “driving seat” when it comes to buying property.

Let’s say you have $ 30,000 saved up in a bank account….this capital is giving you an interest rate return of 5%(for example ) .. This equates to $ 125.00 a month with no increase in capital.

2 can be better than 1!

In a previuous article   (Setting a Fair Rent)  I discussed property types, the fact that 2 can be better than 1,  and the advantage of buying 2 properties as oppossed to 1 property)

For ther purpose of this article I have assumed that you have seen 2 rental properties for sale for $70,000 each… you need to pay $ 140,000  .. you already have $ 30,000 as deposit …..

Bank lending information

The  bank is to lend $110,000 at an interest rate of 5.0% over a 20 year term on a Capital & Interest basis

( your monthly payment each month is split between a part capital payment plus the balance as interest to the  lender )

At the end of 20 years, because the mortgage is on a Capital & Interest basis, the loan is guaranteed to be repaid.

Now this is where it gets interesting.

Interest payment per month is $ 730 .00 …

Each property has an expected rental return of $600.00 a month.

This equals $1,200 for both properties.

Your mortgage is costing you $ 730.00 a month; therefore you have $ 470 left over each month.. that is fairly easy maths!

Now compare the $ 470.00  a month, with the $ 125 a month you were receiving from the bank… again the maths here is not difficult!

“Risks” that you have to consider.

If one property is empty with no tenant, your rental income is reduced to $ 600 a month, but your loan payment is still $ 730.00.  This means you have a “shortfall” of $130 to find each month from your own resources.

Once you fill your empty property, you will be back in profit.

Obviously, if both properties were empty,  you are faced with a loan payment of $ 730.00 to be paid from your own resources.

The “Plus” points of rental property ownership

• Increase in Value

The property you have bought as your rental property, possibly as part of your expanding rental portfolio will increase in value over the course of time.

This is a fact…. Historically when slumps occur,  prices have always recovered due to the unrelenting demand for property coupled with the decreasing supply of available property.

• Annual Rent Reviews

Each year,  as part of the signed Rental Contract,  you will have an  Annual Rent Reviews clause (See Article  Setting a Fair Rent)  which will allow your rent to maintain its buying power with increases in line with inflation, or what you decide is a Fair Rent.

Make Changes to the Monthly Interest Payment

The monthly interest payment of $ 730 a month on a Capital and Interest mortgage arrangement over a 20 year term could be reduced by a number of methods

1:  Extend the Term

Ask to have the term extended to perhaps 30 years

This would reduce your monthly payments to $ 595.00

The results of this are as follows:

• A surplus of $ 605 a month ( $1,200 – $595) when both properties are filled
• Reduction on the  call on your own resources when 1 or both properties are empty.

2:  Bring down the Mortgage Balance

Whenever possible throw in a lump sum to bring down the mortgage balance .. this may come from other savings you have or a maturing savings / insurance policy.

Wherever the extra capital comes from,  it will certainly open up a number of “bonuses” for you

• Your monthly mortgage payment required will decrease as the capital owed has decreased
• You keep paying the same amount each month to your mortgage,  and as less is required to pay the monthly mortgage payment,  the “extra”  is used as a capital payment  overpayment.
• This has the effect of bringing the capital owed down more quickly,  and therefore reducing the term of the mortgage.

3:  Change the loan from Capital & Interest to Interest only.

Many property entrepreneurs rely on the value of the property increasing over the course of time and are happy to arrange an Interest only mortgage.

The term of the mortgage is irrelevant as it is only interest that you are paying.

When you come to sell the property,  the expectation is that you will have waited long enough, before selling,  to be able to enjoy higher re-sale values, and as a consequence, a healthy surplus between the mortgage loan you are repaying,  and the increased value of the property.

If prices have not increased,  hopefully, you will have the option of waiting until they do rise.

Obviously,  if values are low when you have to sell,  you may make a loss on your investment.

What will the effects be on the $ 110,00 mortgage loan?

By switching to an Interest only mortgage with no monthly payments to reduce the capital, your interest only payment on a loan of $ 110,00 at 5%  interest would change to $ 550.00 a month.

You do not have the loan amount reducing, but you have more “extra” income available each month when both properties are full,  as this works out to be a surplus each month of $650.00.

This also means that if one property is empty you still have sufficient rent from the other property to pay the mortgage payment each month without having to dip into your own resources.

What do you do with the surplus each month?

The surplus each month can be put to any number of uses,  and you can even set aside a portion each month to allow you to accumulate capital,  and after, say, 12 months ( assuming the mortgage company will not penalize you),  you could throw the capital saved,  into the mortgage.

What effect would a capital reduction have?

The effect of a capital reduction on an Interest only mortgage would mean that the Interest payment required is reduced because the capital owed is reduced.

You now have a choice

• You either reduce your payments to cover the new,lower monthly interest rate charge, or, you keep paying the same amount each month to your mortgage.

• As less is required to pay the monthly mortgage payment, the “extra” is used as a capital payment overpayment.

• This has the effect of bringing the capital owed down more quickly.

Always remember to check the small print!

It is important to point out here that mortgage companies set their own criteria for adjusting mortgages, paying back lump sums to a mortgage and changing mortgages from Capital and Interest mortgages to Interest only mortgages.

Be careful when considering adjusting your mortgage with your existing lender,  or moving to a more attractive interest rate with another lender.

Check what, if any, early redemption penalties apply  to your loan.

In addition, always check what fees the lender is going to charge, and always insist on receiving a written quote before proceeding.

Interest Only.. it can be taxing .. in the best possible way!

Depending on which country you have your property and depending on the taxation arrangements,  it is sometimes possible to offset up to  100% of the interest payments as a legitimate expense against tax,  as no capital payments are being made

Worldwide demand for rental property

The rate of home ownership varies from country to country across the world,  and as a consequence the demand for rental property varies from country to country.

I have written a couple of articles which focus on the best places to buy property,  due to high rental demand, “Where is a good place for Real Estate Rental Opportunities?” and “Hurry and Catch a Ride for Rental Property Purchase Areas!”

Future articles are in the pipeline with details on new rental “hotspots” and updates on areas already visited.

The fact that I have access to different areas in the world where rental properties are in huge demand and rental income returns are excellent,  is good news for all types of property entrepreneurswho wish to start, or grow their property rental business on a global scale.

Details

Soon I will be releasing details of areas throughout the world for my readers.

This will assist you in your search for popular rental areas,  and help you  decide if you want to invest in any of those areas with the knowledge available from my (”Men/Women on the Ground”)  correspondents who are already in place and familiar with the local property rental markets they are dealing in.

Watch out for my “Men/Women on the Ground” articles to help you locate attractive property rental areas combined with attractive purchase prices.

I will be releasing details of these areas for my readers in the near future.

What better way is there to find a property bargain than to have your own “Men/ Women on the ground” who are hunting out the best property deals for you?

Be sure that you are ready to read my future “Men / Women on the Ground” articles.