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What is an Income to Rent Ratio for Investment Property?
There is one thing that everyone needs in life. This thing is money. There are plenty of people in life that have love, friendship and companionship but lack money. It does take money to invest in real estate. When you buy a property, one of the first things that you will have to do is qualify a tenant. You might purchase a turnkey property that has a tenant attached. This tenant might not last and you will have to find another. Learning what is an income to rent ratio for investment property will help you learn how to financially qualify a tenant. The entire purpose of owning your property is to earn enough to cover your own expenses. What is left could be your profit for your hard work as an investor.
Calculating Income to Rent Ratios
There are different qualifications for every landlord. Some might prefer to have a tenant earn three times or more the monthly rent that is to be paid. This is usually a gross amount of the earned income. This would provide a simple starting point for determining if a tenant can pay the rent you are asking. Most rental applications will require a tenant to include limited financial information. This can include gross monthly income, hourly wages, total monthly expenses and any credit card or loan debts that are outstanding. If you are going through applications, putting a simple financial test together can help you do a quick qualification.
A tenant that earns $2500 a month could have these monthly expenses:
Credit Cards $100
Child Support: $300
Car Insurance: $75
Fuel Expense: $100
Potential Monthly Rent: $500
Total Expenses: $1425.00
A simple rent ratio of three times the monthly rent price would estimate that this tenant could afford to pay the monthly rent for your property. This is a gross total and does not include city, state or federal taxes. A further calculation would be needed to deduct taxation. A standard rule when evaluating taxes is to use the federal average of 28 percent.
The updated income to rent ratio is as follows:
Monthly Earnings: $2500
Combined Taxes: 28 percent
Adjusted Net Income: $1800
Total Expenses: $1425
Income After Expenses: $375
This calculation reveals that a tenant that earns $2500 gross monthly income, which is five times the example asking price, could theoretically afford to rent the property without missing payments. This is what most property managers search for when evaluating a tenant. Each tenant will have different circumstances, needs and expenses that come with renting out a property. The legwork that is involved with calculating an approximate income to rent ratio is why most investors prefer to use a property management company.
Whether you plan to buy and manage your own property or use a property manager, knowing what is involved in calculating the income to rent ratio will help you. You don't have to be an accountant to understand some basic mathematics of real estate. Making wise investment decisions is much easier when you have a team around you that you can turn to for real estate investing advice online or offline.
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JWB home buyers Blog11 Dec
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