Investing in real estate is an excellent way to build wealth and expand one’s income, especially in a vibrant city like Baltimore, Maryland. Every year, young professionals and families flock to Baltimore for opportunities at John Hopkins, Under Armour, T. Rowe Price and beyond. If you are comparing stock market and other investments to owning rental properties in the city, discover four ways that you can earn money and build wealth to secure your future!
The first and most obvious way to make money owning rental properties is the cash flow a property generates each monthly. Simply estimate the rental income, then deduct operating expenses such as property taxes, property insurance, license and registration fees, service contracts such as grass cutting, snow removal, trash removal, sprinkler/alarm maintenance, property repairs and maintenance, and the utility costs for which the landlord is responsible. Typically, an investor would deduct the cost of property management fees, even if the owner self-manages. The result is the “net operating income” or NOI. However, the profit realized is not accurate until one deducts the cost of financing. Usually, one includes only the principal and interest payments as the cost of financing. Many mortgage payments include escrowing monthly for the property taxes and insurance, so be careful not to count tax and insurance payments twice (once in the operating expenses and again as part of the mortgage payment).
After deducting financing costs, the result is “Cash Flow”. Divide the cash flow by the amount of cash invested (down payment plus closing costs) to arrive at the Return-On-Investment (ROI).
In our example, a building with five apartments near Johns Hopkins Hospital produces $61,780 in expected gross rental income. Deducting $23,977 for operating expenses and $26,696 for mortgage payments leaves you with $11,107 in your pocket.
You may keep a keen eye on the value of your home, but you can also make money on your rental property in Baltimore if it appreciates over time. As the value of the property increases, your return on investment increases. The appreciation rate depends on a variety of factors, such as the property’s condition, amenities offered, rent growth in the neighborhood, and the popularity of the surrounding environs. Properties like the five apartment building referenced above have modern amenities that prospective renters seek out, like black stainless steel appliances, central air conditioning, and laundry in the building.
Leverage occurs when you borrow money to finance a larger property than you could afford if you were to pay all cash. Leverage allows you to multiply your return on investment when the value of the property goes up. For example, a $495,000 property that goes up in value by just 5%, equates to a value increase of $24,750. While this is just a 5% increase in the value of the property, if you only have $148,500 invested (down payment plus closing costs) your actual return on investment (ROI) as a result of a 5% price appreciation is a whopping 17%!
One of the biggest advantages of owning a rental property in Baltimore is that the tenants pay down your loan. Even if the property does not increase in value over the years, equity will increase solely by paying down the mortgage. In our example, in just the first year, the principal payment totals $7,382, representing a 5% return on your initial investment of $148,500.
Each year, the amount of the principal part of the mortgage increases. So, while the ROI is 5% in the first year, it increases each year thereafter.
A rental property owner pays fewer income taxes on real estate investment than on other forms of investment. As a Baltimore City rental property owner, you are providing good homes for the community. The tax code provides benefits to the landlord community since the government promotes investment in housing.
In summary, there are several ways to make money from owning a rental property in Baltimore, Maryland. Once you have calculated the cash flow, appreciation rate, equity build-up, and tax savings, you can determine the total amount of money you will make from this investment.
Are you interested in learning more about investing in rental properties? Contact Ben Frederick Realty! With over three generations and 100 years of apartment property sales, management, and development experience in Baltimore, we are confident that we can help you find the perfect investment property. Feel free to give us a call at (410) 752-6400 or send us an email on our contact page.