Why The Mortgage Payment Calculation Process Is So Important For Rental Investing

What is a mortgage payment calculation, and why would investors of the passive income variety need to concern themselves with such a process? Isn’t the whole idea of investing in a passive income portfolio to have someone else pay down your mortgage (in the form of rent) so that you may capitalize on the backend?

In short; yes, but that doesn’t mean you won’t have some work to do up front, and the mortgage payment calculation is no exception. Passive income investors, or at least those that want to secure their future accordingly, will need to have a strong grasp of the mortgage payment calculation process if they are to ever find a viable deal.

Investors covet few things more so than the often sought after passive income stream. After all, what’s better than a source of income that’s, well, just that: passive? But I digress; passive income, while a great wealth building vehicle, isn’t entirely passive.

Why The Mortgage Payment Calculation Is So Important

While the name may imply it, passive income isn’t exactly passive until you put in the leg work up front. It’s true; a great passive income portfolio can produce years of returns with virtually no work on your behalf, but you must first get it to a point in which you may remove yourself from the equation. Only once you have a sound foundation can you realize the true potential of a properly developed passive income portfolio. In order to get to that point, however, there are several things you must address, not the lest of which is analyzing a deal in the first place.

Determining whether or not a property is a viable option to compliment your passive income strategy is a skill in and of itself. And like a skill, it must be honed. As an investor, it’s in your best interest to learn how to analyze deals efficiently and accurately. In fact, you could argue that the best investors aren’t the ones that deal in the largest volume, but rather the ones with the foresight to see a great property for what it really is: a chance to increase your bottomline.

But in order to know whether or not a property has potential, you must first mind due diligence and determine one thing before anything else: the mortgage payment calculation.

It’s not enough to simply acquire a passive income investment property; you must do so with the intent to offset any resulting mortgage payments with enough passive income that makes the entire endeavor worthwhile. In other words, you need to be making enough on the back end of a deal for the investment to make sense, which begs the question: How can you tell if a passive income property is worth your while?

The answer may not be as difficult to formulate as you think, and is even more intuitive than most would assume. If you know how much your mortgage is going to cost (in addition to standard expenditures), you will have an idea of how much rent you should be bringing in.

Not surprisingly, the amount a passive income property owner should be charging in rent has a lot to do with the home’s value, as its current price point will typically dictate the amount spent on monthly mortgage payments. That said, most landlords charge between 0.8 and 1.1 percent of the home’s value in monthly rent. As you would guess, a $100,000 home could potentially rent for somewhere in the neighborhood of $800 to $1,000, at least according to general consensus. Bankrate, however, is quick to point out that landlords shouldn’t charge lass than 1.1 percent on a property valued under $100,000. It’s also worth noting that a lower percentage is charged to the renters of higher prices homes, as it’s entirely possible for rents to get too high and scare away renters; it’s a fine balance. And I have yet to mention one of the most important factors: completion. One of the most important factors when deciding how much to charge in rent will be what other landlords in similar properties are charged nearby, otherwise known as comparables.

I maintain that the best way to determine how much to rent out a property for is to first calculate the total monthly expenses of the property in question. In addition to the mortgage payment calculation, you must include everything from property taxes and insurance to maintenance and upkeep costs. Once you have an idea of the amount it will cost to keep the property running on a monthly basis, use the return on investment principle to determine how much you would like to make.

In determining the amount of rent you will charge, add the mortgage, operating expenses and desired return. Provided the number you land on is a competitive price point for would-be renters, you may have yourself a deal. Remember, you can price your self out of the market. Neglecting to settle on a price point renters agree on is key. Don’t just find the line you will make a comfortable return on your investment, but rather the line renters will gladly pay. Sometimes, it’s even worth it to drop rental rates in order to secure tenants.

Ultimately, the decision is up to you, but know this; the rental price should be enough to offset operating expenses, and then some. It’s worth noting, however, that you can’t accurately determine your operating expenses until you have gotten comfortable with the mortgage payment calculation process. Before you buy another passive income property, or even your first one, make sure you have a firm grasp on the mortgage calculation process. Remember, none of this is possible unless you have accurately made a mortgage payment calculation.