Before you make any commitments to a rental property, it is important to calculate your potential cash flow. You need to know how much income you would receive if you rented the property out to tenants. You need to be aware of not just immediate income, but also the probability of a long-term investment.
If your calculations tell you that you should only expect to see moderate growth with only a small income from rent each month, then you may want to look elsewhere for a rental property that better suits you.
The income that you receive from your rental property is an ideal indicator of whether or not you should put your money into a particular investment. In regions where the demand for rental units is high, you can expect a significant monthly income, even more than the cost of the mortgage and other monthly expenses, producing a positive flow of cash on a regular basis.
How To Calculate
Calculating whether or not you can expect a positive cash flow from a particular rental property all comes down to a little simple mathematics. First, you need to start by calculating the costs that you are aware of related to owning the property such as taxes, insurance, management fees, mortgage payment, utilities and any unpredictable costs for maintenance. The number that you come up with here will be your monthly costs for debt and operating expenses.
Next, you need to figure the amount of money that you would have coming your way each month from your rental units. You may be able to get an operating statement from the previous owner to help with this part of the calculations. This should give you a good indication of your expected income.
Once you subtract your monthly expenses from your monthly income, you will have a solid idea of how much cash flow you can expect each month from your rental investment properties.
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Hi Sean,
This is great advice. You really need to be able to crunch the numbers to work out the cash flow you’re likely to get from your rental investment properties. If the numbers don’t add up; it’s not the right property.
I have found it really difficult to locate properties that create positive cashflow, but I have only been in the residential real estate market. Perhaps there is greater potential investing in units.