Casa del Sol - Isabela, Puerto Rico
Thinking about purchasing Casa del Sol an investment property? Real estate has produced many of the world's wealthiest people, so there are plenty of reasons to think that it is a sound investment. Experts agree, however, that as with any investment, it's better to be well-versed before diving in with hundreds of thousands of dollars. Here are the factors and challenges you should consider before buying Casa del Sol, intended as a rental property.

KEY Takeaways

Investing in rental property can be lucrative, but it can come with many challenges.
Being a landlord requires a broad array of skills, from understanding basic tenant law to fixing a leaky faucet.

Experts recommend having a financial cushion in case you don't rent out the property, or if the rental income doesn't meet yourexpectations. Typically when you purchase an investment, it doesn’t require an ongoing investment of cash. But a house certainly does.

Is it better to buy with cash or to finance your investment property? That depends on your investing goals. Our intended market is a cash buyer. Financing in Puerto Rico is an uphill battle, and considering that our closing terms is 30 days after a 50% cash down payment, financing is not highly recommended unless it is guaranteed by a mainland financing institution.

If you’re purchasing Casa del Sol as an investment, appreciation is a factor, but the property’s value is determined by the income it produces, or can produce when performing optimally.

Cash Flow

If you’re buying the house as an investment you plan to rent to vacation renters, you want to make sure that the sum of the nightly rates you are likely to get is much higher than your monthly expenses or mortgage payments on the property if you decide to finance. That number times 12 is your cash flow.

The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or picking up steam. A city or locale such as Isabela, Puerto Rico where tourism and leisure industryis growing and a revitalization plan is underway represents a potential investment opportunity.

Paying cash can help generate positive monthly cash flow. In addition to cash-on-cash return, you’ll want to look at the capitalization rate, which is essentially the rate of return on your money as it would be if you had paid all cash for the property. The capitalization rate (cap rate) of the property is determined by dividing your net operating income (NOI) by the current market value of the property.

Profitability

When choosing a profitable rental property, look for a location with low property taxes, a decent rental track record, and plenty of amenities, such as restaurants, bakeries, shopping, trails, and beaches. In addition, a neighborhood with a low crime rate, easy vehicular access to most destinations, and a growing tourism market may mean a larger pool of potential renters

For example, let’s say you want to buy the property for $350,000 that you will rent as a vacation rental. You expect a conservative rent to be $3,500 per month, because you have done your research on the property by talking to local real estate agents and using rent estimates on sites such as AirBNB and VRBO. Then, you need to account for the following minimum expenses:

EXPENSE TYPE   COST Sample
Property taxes  $150
Insurance            $100
10% of gross rental income allotted for vacancy and loss or damage         $350
5% of gross rental income allocated for maintenance and repairs              $175
Total      $775

In this scenario, you would only have $2,725 in monthly cash flow, or $32,700 in annual cash flow. Therefore you would be receiving a nearly 9.3% annual cash-on-cash return for your money, many ways over to what a certificate of deposit or bond might pay you should you put the same cash there.

Rules of Thumb

One popular formula to help you decide if a property is good investment is the 1 percent rule, which advises that the property’s monthly rent should be no less than 1 percent of the upfront cost, including any initial renovations and the purchase price. For example, if a property costs $350,000, it should rent for at least $3,500 a month. Analyze rental rates of similar properties in the neighborhood to determine a property’s likely rent.

A second rule of thumb is the capitalization rate, also known as a cap rate, which helps determine the rate of return expected compared to alternative investments. To determine the cap rate, first calculate net operating income, which is the expected annual income from rentals minus costs for taxes and maintenance. When estimating the expected income from rentals, be conservative; there are likely to be periods of vacancy between tenants. Then, divide the net operating income by the price paid for the property..

For example, if the net operating income for a home is $30,000 and the property value is $350,000, the cap rate would be 8.6 percent. A cap rate between 4 and 10 percent is generally considered a good rate because it is comparable to other investments such as Treasury bonds or stocks.

Your Goals

You should have a clear goal in mind and understanding of the market. If the goal is to keep the property as an investment for income and to have a long time frame, purchase price is less of a concern as long as cash flow is positive and trending upward. Over a decade or more, the positive rate will grow with inflation and as costs decrease. If the goal is to maximize profit, the price you pay and how you pay it is important.

Location, Location and Price Appreciation

What factors are important for an area (and therefore property) experiencing price appreciation?

Growth: the neighborhood is experiencing a renewed influx of local and international tourists, and lots of building renovations, the price of vacation rental units in the area is typically increasing.

Local medical services: access to hospitals, doctors, clinics, and care quality remain a driving force of real estate appreciation in Isabela

Walkability: current areas with easy access to local shops, restaurants, and amenities are increasingly popular. This is certainly leading to predictable price appreciation.

Nature: University of Washington research indicates that homes adjacent to nature parks and open spaces hold a 8%-20% higher value than comparable properties.

Commercial properties: Supermarkets, eateries, drugstores and retail shops on every corner may work for your investment. Properties in Isabela close to those facilities appreciate faster than other properties

And of course, many other factors go into price appreciation - or lack thereof- such as population trends, the economy, and mortgage rates, which can be more difficult to predict.

The Right Location: The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or picking up steam. Isabela is a small city where tourism and leisure travel destination is growing and a revitalization plan is underway by the local government and the private sector, representing a potential investment opportunity.

Casa del Sol is well positioned as a profitable rental property, a location with low property taxes, a decent commercial and low pace entertainment, and plenty of amenities, such as restaurants, bakeries, shopping, trails, and beaches.

Best of all, Casa del Sol is located in a neighborhood with a growing international visitor and tourism industry, meaning a larger pool of potential renters.