Rental Property Numbers: Easy as 1, 2, Cash Flow!
Finding the perfect rental property can feel like searching for a buried treasure. But before you grab your shovel, there's a secret weapon all successful treasure hunters use: a map! In this case, your map is the numbers.
Why are numbers so important? Because happy landlords make money, and the numbers tell you if a property will make you money (or leave you digging a financial hole!).
So, how do you use this treasure map? It's easier than you think! Here's a step-by-step guide:
Step 1: Finding Your Rental Income
Think of this as the "X marks the spot" on your map. This is how much money the property will bring in each month from rent.
If the property already has tenants, use their rent amount.
If it's vacant, research the average rent for similar properties in the area. Websites like Rentometer.com can help!
Step 2: Mapping Out the Expenses
Every treasure has its costs, and rental properties are no different. Here's what you'll need to factor in:
Property Taxes: Check your county's tax assessor website.
Insurance: Get a quote – it's usually around $750-$900 a year for a typical property (depending on location).
Property Management (optional): This fee is typically 8-10% of the monthly rent.
Mortgage (if financing): Use an online calculator to estimate your monthly payment.
HOA Fees (if applicable): Check with the seller or your agent for this cost.
Vacancy: leave blank for now
Repairs: leave blank for now
Step 3: Is There Treasure Here? Uncovering Cash Flow
Now comes the exciting part – digging for gold (or, in this case, cash flow)! Subtract your monthly expenses from your monthly rent. This is your net income, also known as cash flow.
Positive cash flow? Great! That means the property makes you money every month. Negative cash flow? Uh oh, this might not be a good investment.
Step 4: The True Treasure – Cash-on-Cash Return
This number tells you how much return you're getting on the money you actually invest (not including the mortgage if you have one).
Cash-on-Cash Return = Net Annual Income (Yearly Cash Flow) / Total Cash Invested
Step 5: Practice Makes Perfect!
Ready to test your treasure-hunting skills? Let's use a real example:
Purchase Price: $197,000
Rent: $1,895/month
Monthly Expenses: $295
Mortgage: $1,091/month
Cash Flow: ($1,895 - $295 - $1,091) x 12 months = $6,106.51/year
Let's say you put a 20% down payment (plus closing costs, around 3%) on this property.
Cash-on-Cash Return: $6,106.51 (/) $45,310.00
Equals = 13.48% in year 1
Remember: Now what about future vacancy and maintenance? We know that at some point you will have these expenses, we just don’t know when or for how long. So, I recommend that you prepare the RIGHT way by having a reserve account set up for this future expense. If you take your entire cashflow from year 1 ($6106) and put that into a savings account, that is designated to cover future costs then you are really prepared when you need to tap into it.
Running the numbers is a breeze! Grab a notebook, jot down the expenses for any property you're considering, and see if it leads you to a treasure trove of cash flow!
P.S. Numbers are just the first step. We'll talk about other factors to consider when finding the perfect rental property in the future!