How To Calculate Cash Flow On a Rental Property

When buying rental properties like furnished apartments, it is important that the properties bring in positive cash flow each and every month. You do not want to be stuck in a situation where you are losing money every year because you didn’t calculate the right numbers before purchasing the property. So before you even consider making your offer to purchase a rental property, make sure you are doing the correct math by consulting with a professional property management group, so you end up with a profit at the end of the year. Below are the 5 critical numbers you need to know in order to make it a cash cow in your rental portfolio. We like to make at least $200 per month per property that we own and factoring these expenses below will help you get to that number.

 

Rent. Run the rental comps in the area to determine what a competitive market rent is in that area. Just like selling a retail property if you are overpriced then it will sit on the market. Rental properties are no different. Price them right so you can rent them fast.

 

Management Fee’s. I am a big proponent of hiring a property management company to manage the tenants and overall maintenance of the building. The average fee for a management company is 8-10% of the total rent that is paid. The management company only makes money off of the rents that are paid.

 

Mortgage Payment. Before you make an offer to buy a property consult with your mortgage broker to see what you mortgage payment will be. The mortgage payment will consist of the principle & interest fee’s. A 30 year mortgage is cheaper and will allow your property to cash flow better

 

Insurance. This is one of the more overlooked expenses in calculating cash flow. Make sure you shop it around and find the cheapest rate with the best coverage.

 

Property Taxes. You can search the local tax assessors office to see what the annual property taxes are on your property. You can build this expense into your mortgage payment. However, you have the option to hire a property tax services firm to evaluate your property taxes and determine if you can file an appeal.