So perhaps you understand the concept of income-producing property.  And perhaps you’re interested in getting involved in what amounts to an incredible investment.  But how do you run the numbers on a potential opportunity?  Here is a quick guide on how to ‘do the math’.

The formula is simple: you want to analyze income versus expenses. A property with high income and low expenses is the ideal, which should be fairly obvious.  What may not be obvious immediately is the scope of line items you’ll want to account for when looking at a potential property. 

Income

Rents – The main source of income will likely come from your tenants’ rents.  In general, more units are better, because it mitigates your risk of income loss from vacancy (lack of tenants) and because it spreads fixed expenses out over more income streams.  In Toronto it is becoming somewhat hard to find properties that ‘carry’ themselves (cover all expenses with internal revenue) with only one rentable unit.  Though it is still possible, I would generally recommend looking at properties with more than one separate unit to rent.

Parking – You may be able to make a separate monthly income from any parking spaces you own – especially in the downtown area near desirable and high-traffic areas.

Laundry – Laundry and other coin-operated devices will serve as an additional source of income.  Be sure to make a realistic calculation of what these may add to your bottom line.

Other – If your tenants pay utilities, for example, you could count that as income – as it will negate the utilities expense on your cash flow statement.  Keep an eye out for rental agreements that include the tenant paying for some or all utilities.

Expenses

Debt Service – Also known as a mortgage, your monthly debt service will commonly be your largest expense on an income property.  Be sure to know your carrying costs in this category before you commit to a property.  Also watch for the direction lending rates are moving if you are going to select a variable mortgage product.

Taxes – You can’t avoid them, unfortunately, and they are never likely to go away - even when your debts are paid entirely.  Along with maintenance and insurance, be sure to factor these into your calculations for permanent ongoing costs.

Maintenance – No matter how new and fabulous a property appears, there are going to be ongoing maintenance costs.  Be realistic.

Insurance – You will have to have insurance on the property if you are financing the deal.  Banks require it so that you don’t burn their investment collateral to the ground – literally.  Ask your insurance professional for an estimate as rates vary greatly depending on the property.

Utililties – Make sure to account for utilities costs unless you’re absolutely certain you can get your tenants to pay for them.  They’ll fall back on you if you can’t.

The rest is fairly simple.  To get a rough idea of your cash flow (profit/loss) just simply add up your sources of income and take a small percentage off for vacancy and credit loss (tenants not paying their rent – it happens) and then subtract your expenses.  I would use 5% as a reasonable number for my vacancy loss when calculating.

Is the result a positive number?  Great!  If your numbers were accurate, then you stand to make money!  This may be a property to consider if all other factors look sound.

While your home is for sale, whenever the phone rings it could be someone who wants to take a look. Here are some guidelines to follow when a prospective buyer asks for a showing:

* Set an appointment for a specific time.
* Always prepare the home before it is shown, even if you have to leave work to do so. Make sure the kitchen and bathrooms are spotless, dishes are in the dishwasher or put away, beds are made, and everything is picked up.
* Turn on lights in every room, open curtains or blinds, and have soft music playing.
* Verify that valuables are put away. Lock up guns and medicines.
* Have copies of your property brochure or flyer available.
* Ask visitors to sign a guest register so that you’ll have their name and contact information.
* Introduce yourself at the front door, but then invite them to tour your home by themselves. Buyers will feel uncomfortable making comments about your home in your presence, so give them as much privacy as possible.
* When they’ve completed their tour, ask them if they have any questions or would like to take a second look at anything.

One of the quickest ways to spend less time traveling to and from your workplace is to work from home, or telecommute!

To maximize your productivity when working at home, you can set up a home office, creating a protected environment away from normal household distractions where you can concentrate on your work.

Here are some suggestions for setting up a successful home office:

* Create your office in an area away from the general household activities.
* Have enough electrical outlets to handle your computer, lights, printer, and so on.
* Make sure there is plenty of light.
* Install a phone jack for your business line.
* Get organized with filing cabinets, storage space, and bookshelves.
* Plan the space in your office to avoid tripping over electrical and phone cords.
* Include a sound system. Many experts believe that music encourages productivity.
* Keep track of all your home-related business expenses for possible tax deductions.

It’s no surprise that the number of people who want to telecommute continues to grow. Earning a good salary at a good job that allows you to work from the comfort of home does seem to be an ideal situation.