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Shouldn't the rent cover the mortgage?

By
Property Manager with HomePointe Property Management, CRMC 00691121

Many property owners that have just purchased their first rental think that the rent should cover the mortgage payment.  Those of us in the property management business know that this is just not true. 

 

If it was true, would a landlord that paid all cash and had no mortgage payment rent their house for free?  The mortgage payment reflects how much the down payment was, what the interest rates were at the time of purchase, and what the loan terms are. 

 

Rents are determined by current supply and demand of rentals in the specific area.  If the population was shrinking, and too many rentals were coming on the market, landlords would have to get very creative to fill their vacancies.  They might give free rent for a few months or just lower their rents to fill the spaces.  One thing they would not do is check how much their mortgage payment was.

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Posted by

Robert A. Machado, CPM, MPM

HomePointe Property Management

Sacramento, Yolo, El Dorado, and Placer Counties

We manage residential and commercial property.

916-429-1205 x 105

rmachado@HomePointe.com

Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

In our area if a landlord has a mortgage, he would usually have to bring money besides the rent. From $300-$400 to a $1,000. ALl depends on the property, of course.

May 10, 2008 07:06 PM
Kevin O'Shea
Coldwell Banker - White Plains, NY
White Plains, NY Real Estate

Good post. New landlords don't always have a good grasp of the rental market.

All the best!

May 10, 2008 07:15 PM
Kevin O'Shea
Coldwell Banker - White Plains, NY
White Plains, NY Real Estate

Good post. New landlords don't always have a good grasp of the rental market.

All the best!

May 10, 2008 07:15 PM
Vanessa Krempa
Princeton, NJ

Any suggestions on how to explain this to an investor?  Beyond looking to adjust their down payment, I've tried explaining that if they really want to buy into this market that they are buying with hopes that the property values will appreciate and they'll make the bulk of their profits when they sell.  I would love your insight because I have several investors trying to buy in a still rather expensive market.

May 10, 2008 10:22 PM
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management

1. The sales market and the rental market operate independently based on supply and demand of their respective buyers and sellers, landlords and renters.

2. Markets with appreciation will have worse cash flow for investors since a part of the return is made by the appreciation in an appreciating market.  Prices are driven up and rental returns driven down.

Those are two ways to explain it.

May 11, 2008 10:27 AM
Teresa Franco
Keller Williams Realty - Amarillo, TX

Thanks for sharing.  I learn something every day! 

May 12, 2008 02:56 AM
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

You're right. Rent is only a part of the cash flow analysis in determining whether a particular property is a good investment for a particular investor.

May 12, 2008 06:42 AM
Jeff Stinson
Kasteel Property Management - Property Manager - Springville, UT

I don't know how many times I've had to explain that.  Renters are not interested in paying rent that is high enough to cover the Landlords bills.  They care about what is the price on the one down the street.

It's fun helping out new landlords though.  I love educating people about investing in real estate.  If you have any other thoughts or questions I'd like to hear them.  My website is www.stonebridgerealestate.net

 

May 12, 2008 11:10 AM