INVESTING IN REAL-ESTATE How to Analyze an Income Property – Cash Flow

Published: 24th September 2010
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It is said that more millionaires have been created through real-estate that any other investment. Although this is no doubt true, I’ve seen many examples of how real-estate investing can just as easily cause financial hardship. In this article we’ll look at how to analyze an income property for positive cash flow and take a look at the financial variables many people overlook when investing in rental properties. The use of an appropriate real-estate calculator can be invaluable.



There are three significant variables that impact the potential value of your rental property over time.

1) Property Appreciation

2) Principle Reduction

3) Cash Flow

There are many expenses that are often overlooked when trying to analyze for positive cash flow real-estate. At a minimum, the goal of most medium to long-term rental property investors is to collect the maximum amount of rental income each month from your tenant(s) and pay off ALL of the monthly expenses related to owning and operating that property. Hopefully, over time, the difference between what you collect as rent and what you pay as expenses grows and you’re able to add the difference to the growing pile under your mattress. Let’s explore the often overlooked expenses you should consider when evaluating for positive cash flow.



Mortgage Insurance – Usually optional insurance, often with your mortgage lender, that protects your mortgage and payments in case of death or disability.



Vacancy Allowance – When performing their rental property investment analysis many people choose to ignore this critical factor. No matter how popular your property, there’s a good chance you will not have tenants every single month for as long as you own the property. A best practice is to budget for a vacancy contingency fund. This cash will sit in a separate bank account ready to cover any short term tenant vacancies. A good rule of thumb is to double the vacancy rate for comparable properties in that area and apply that as a percentage of rent. (i.e. If the Vacancy Rate in your area is 2% and you collect $1000 in rent each month, take $40 cash each month and place it in the Vacancy Allowance Fund.



Advertising – You will need to advertise your apartment to potential tenants. The cost here will depend on your tenant turnover and your advertising medium.



Property Management – You may contract with professional property management company to manage the property for you (place tenants, collect rent, manage maintenance issues, etc). These companies often charge a percentage of rent ranging from 6% to 12%. It is very important to research these companies ahead of time. If you choose to manage the property yourself, you may save yourself this cost, but don’t forget that your time is valuable too.



Maintenance Allowance – Another critical contingency to build into your rental property investment analysis. This fund will cover the plumber in the middle of the night, new paint when changing tenants, and any other unforeseen property maintenance expenses that may occur throughout the year. This cost is often determined by the age and condition of the property as well as the capabilities of your tenants. As a rule of thumb, you may want to consider setting aside 4% - 8% of the monthly rent as a Maintenance Allowance contingency fund



Rental property investment analysis, to find positive rental property cash flow, requires you consider many factors. Using a simple yet comprehensive real-estate investment calculator will not only allow you to quickly and easily determine if your potential investment will produce positive cash flow, but help you project the return on investment of your rental property and achieve your financial goals sooner. You can find this and other real-estate calculators at www.verusdecisions.com.

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