When evaluating a potential rental or even one for a flip that will be sold as an investment property, the initial consideration beyond price is how much you will net each month. It’s cash flow; the positive kind. Buying real estate and throwing money at it each month will eat at your bottom line and take away from other units you own that do in fact put money in the bank. But how do you determine cash flow?
First take your rent. That’s the easy part, it’s what you subtract your expenses from. The next part is identifying all potential expenses for your rental.
Mortgage. This is the most significant factor when calculating cash flow; it’s the principal and interest payment that goes to the mortgage company each month.
Property Taxes. Regardless if you pay your property taxes annually, semi-annually or monthly, your annual property tax bill is divided by 12 (months) and subtracted from monthly rent.
Insurance. Homeowner’s insurance is also an expense, and the monthly amount for property insurance is deducted as an expense.
HOA Dues. Homeowner’s Association, or HOA Dues should also be included as a monthly expense. Divide the annual dues by 12 to get a monthly amount.
Management Fees. If you use a property manager, be sure and include the costs of property management when calculating cash flow.
Vacancy. Your property will never be permanently occupied. Renters don’t stay around for very long, sometimes just for a few months. You need to consider a vacancy factor when anticipating cash flow. A one-month’ vacancy is a common adjustment, so divide your rental income by 12 and subtract from the rental amount.
Maintenance. This depends upon the property but be sure to include anticipated expenses for repairs and maintenance such an as occasional visit by a plumber or replacing a hot water heater or appliance. Good quality appliances should last at least 10 years.
After you’ve considered all possible expenses and listed them as a monthly expense, you can then arrive at your vaunted cash flow. Don’t spare any expense and be a tad liberal, it’s better to be surprised by more income than by less.