How to Make $40,000 a Month by Renting Apartments
Earning a living from your real estate investments takes a keen eye and quite a bit of business acumen. You must be able to navigate through real estate boom and bust cycles. You must be able to handle tenant issues including filling vacant rental units to avoid losing income. However, if you are diligent, you can successfully own and manage enough properties to generate a monthly rental income of $40,000.
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Instructions
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Research the localities where you want to buy your investment properties. A good location will determine how much rent you can charge your tenants. Look into areas that have attractions such as shopping and eating districts, a college population and strong workforce. These areas are more than likely to attract tenants looking for apartments. However, real estate prices tend to be more expensive in these areas.
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Determine how many investment properties you will need to accumulate in order to reach your objective of $40,000 in monthly rental income. For instance, just one investment property with 40 units and a rental rate of $1,000 per unit can bring in $40,000 of rental income.
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Calculate the value for each property. The value of a property is net operating income (NOI) divided by the capitalization (cap) rate. The formula for NOI is: NOI= Effective Gross Income - Operating Expenses + Recoveries. Where effective gross income is gross rental income less mortgage; operating expenses include management fees, utilities, maintenance and repairs; and recoveries include operating expenses recovered from tenants. The capitalization rate is rate that returns a zero net present value of the future stream of rental income from each property. The capitalization (cap) rate is the equivalent of your required rate of return on each property. For example, if the NOI of a property is $50,000 and the cap rate is 10 percent, the value of the property is $500,000. This means you shouldn't pay more than $500,000 for the property.
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Figure out how much money you need to put down on each property. Commercial real estate lending guidelines are different than personal property. For instance, you are required to put down at least a 20 percent deposit. Most lenders do not make commercial real estate loans with loan-to-values of less than 80 percent. The lender will also want to know how much rental income you expect to generate from each property. The seller of the investment property usually provides income information on the property, but you will have to make your own assumptions.
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Select a banker with a strong commercial real estate lending experience. You want a banker who understands the local real estate market and has a good track record for closing transactions. Because you are a real estate investor, the bank's underwriting criteria will be stricter than for a home mortgage. The bank will most likely want to see your NOI and cap rate assumptions for each property. The bank will most likely discount your NOI and cap rate assumptions. A key metric for commercial real estate lenders is the debt service coverage ratio that measures the property's ability to cover the monthly mortgage payments. A good debt service coverage ratio is 1.2 to 1.5 times.
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Begin advertising your rental properties with a local Realtor. The real estate agent will begin showing the properties to potential tenants. You will have to have each unit ready for tenants to move in. Factor these amounts into your cost assumptions. You must also factor in having to carry the mortgage until each property begins to generate sufficient income.
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Rent out your apartments. Your rental rates should be in line with the going market rate. Each unit you rent will bring you closer to your goal of getting $40,000 in rental income per month.
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Tips & Warnings
If you have a number of income producing properties, you should consider hiring a real estate management company. This takes the burden off you of having to collect rent payments, track down tenants, show apartments, and other related landlord-tenant issues. Figure out the real estate management and fee and include this in your operating budget.
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