- Real estate appreciation rate.
- Vacancy Rate.
- Management Fee.
- Maintenance Percentage.
- Equity Share Percentage.
An investment can’t be
made without making certain assumptions regarding the investment and the outcome. Here’s a little more information about income property assumptions.
The thing about assumptions is they need to be adjusted sometimes. These adjustments are generally done in your favor, but will need to be done occasionally based on how the investment is doing. These adjustments may depend on the appreciation of the property, how long the property is vacant, or how long the tenant stays.
Real Estate Appreciation Rate
Appreciation is related to the “buy low, sell high” principle. However,
unlike stocks, income property investment doesn’t rely on buying low and selling high, appreciation is more like an added bonus. Determining appreciation, however, will require some assumptions, but it’s only part of the big picture.
Vacancy rate determines the average of how long a tenant stays in a property, and how long the property is vacant. For instance, if a property is vacant for two months, and then a tenant moves in and stays for two years, the vacancy rate will be 8%, or 1 month per year.
The management fee is basically the cost of management. Essentially, it makes it so you don’t have to speak or interact with your tenants, and this equates to roughly 10% of your income, depending on the area. Jason Hartman, for instance, rarely ever interacts directly with his tenants. One thing to consider, however, is that choosing a management company takes some control out of your hands, and negates certain tax benefits which can be gained by managing your own properties.
For most income properties you purchase, assuming they’re fairly new, there’s no need to worry about maintenance costs for the first year or two. So, we can assume the average percentage of income which goes towards maintenance costs is 2%.
Equity Share Percentage
Equity share percentage is fairly simple. If
you’re the sole owner of an income property, we can assume you own 100% of the property. However, if you have a partner, we would likely instead assume you own 50% of it.
Assumptions will always need to be made and adjusted on your investments. With the right strategies and information, it’s possible to make accurate adjustments throughout the life of your investments to make good decisions and have an idea of income earned.
The Young Wealth Team