Well, if you have followed the steps in Part I and II you have educated yourself by reading up on real estate investing. You have interviewed a few Realtors and have found one that knows how to find investment opportunities. At this point, talk to mortgage brokers and your accountant to get a clear picture of the amount you can comfortably spend on a property.  Discuss how much to put down, rates, and paperwork required etc… Make sure you do this before you move to the next step which is looking at properties.  This information will help your Realtor show you properties that are within your budget.  You don’t want to waste time falling in love with what you can’t afford.

It’s time to start looking at actual properties.  You will be looking at real estate properties for their income potential not their appreciation possibilities.  To do this, you need to know what rental properties are going for in the area and how many are vacant.  This lets you know what you can hope to charge and what your chances are of getting a tenant fast will be. Your Realtor can assist you in carefully examining the profit and loss performance so that you can decide whether the property is a good investment. Rental property performance is based on the following:

•    Gross Annual Rent - The total amount of rents paid by the tenant on the property for one year. Ok, you can rent the house out for $1500 mo. X 12 months equals $18,000.

•    Vacancy Rate - The total amount of rental income to be subtracted (expressed as a percentage of gross annual rent). The house was vacant for 1 month before it was rented – subtract $1500

•    Adjusted Gross Annual Rental Income - The gross annual rent minus the rental income lost through vacancy (determined by applying the vacancy rate multiplied by the gross annual rent). This would be $18,000 – $1500 = $16,500

•    Basic Rental Property Expenses (T.I.M.M.U.R.):
1.    Taxes (Annual Property Taxes)                                                $1300
2.    Insurance (Property & Business/Liability Insurance)                      $300
3.    Maintenance Expenses & Miscellaneous Costs                              $500
4.    Management Fees on the property                                           $1500
5.    Utility Costs on the property                                                       $200
6.    Replacement Reserves - Funds set aside from the adjusted gross rental income to replace structural components or make repairs to the property as needed:                    $1000                                      

  Yikes, this all adds up to $4800

•    Net Rental Income - Subtract the Basic Rental Property Expenses from the Adjusted Gross Annual Rental Income.
                          That would be – 16,500 – 4,800 = $11,700

•    Annual Cash Flow - Subtract the mortgage/debt service (Annual Principal & Interest on Any Loans on the Property) from the Net Rental Income.

 Mortgage P & I is $650 a month. Annually this is $7800 per year. Subtract this from your Net Rental Income and you have made $3,900 for the first year. Not too shabby.

If you are not happy with the bottom line (your annual cash flow), you can increase the rent, postpone maintenance, get a better interest rate or manage the property yourself. So, much to consider!  What you do not want to get yourself into is a negative cash flow situation. This happens when you owe more annually than you make.  That kind of defeats the whole purpose in investing. 

Before you rush into buying a real estate investment, do your homework.  You have to look out for yourself by taking your time, educating yourself and crunching the numbers. Surround yourself with a network of reliable professionals.  Once, you have a taste of success with your first property, you will be considering your second purchase.  Real Estate Rock Stardom, here you come.