When buying property, many investors focus on finding the perfect deal. They look for the lowest price, the highest return, and the most convenient location. However, successful rental property owners must also run the numbers to analyze potential cash flow before closing on a new investment.
Without taking steps to estimate a rental rate and ongoing operating costs, property owners risk failing to meet their investment goals for an optimal ROI. Buying a new property at a low price without making sure you can make money from it could lead you to lose money instead of making it! So, today our Detroit, Michigan property management experts talk about cash flow and how to estimate it accurately for a potential rental property before buying it.
As a property owner, you probably already know that “cash is king” when it comes to success with rental properties. Without sufficient cash every month, there would be no way to pay a mortgage, insurance, or service maintenance requests. So it makes sense that property owners need to know whether or not a particular investment property will generate enough cash to cover all of those expenses—before buying it.
Cash flow refers to the money that flows into a rental property. Generating positive cash flow means that the net income exceeds the universal costs of owning a rental, such as repairs and future home improvements.
Every penny counts when you're pursuing financial goals through real estate investing. Positive cash flow generated by your first property can be used to acquire another property, enabling you to diversify your portfolio more quickly. The more properties you acquire, the quicker you can achieve your real estate investment goals.
In addition, properties that are cash flow positive allow you to receive extra income and reduce your overall risk. For example, when one property in your portfolio suffers a challenging time and fails to deliver enough cash flow, other properties with positive cash flow can offset the negative returns from the low-performing property.
To avoid handling negative cash flow properties, make sure you find a good location, finance the property correctly, set the ideal rental rate, and manage your expenses to follow your budget.
The best positive cash flow investments provide income and allow investors to build wealth for long-term success. If you currently have a property that’s struggling to generate the cash flow you need, or you’re considering a new property if the numbers come out right, a Metro Detroit rental manager can help you run the numbers and improve cash returns!
Although the formula for calculating and analyzing cash flow can be simple, it’s important to consider all critical costs to receive accurate results when conducting calculations. Leaving out a crucial expense can lead to a severe miscalculation, which can lead you to purchase a property that never pays off.
Property managers can help you work through the formula for calculating cash flow. In its simplest form, it looks like this:
Total Income - Total Expenses = Cash Flow
Here's an example of determining a property's monthly cash flow on a property generating a rental income of $1,500 per month based on each month's rent.
Estimated operating costs per month:
Mortgage payment: $519
Insurance costs: $69
Property taxes: $324
Property management fees: $120 (estimated here at 8%, but the costs charged by property management companies can differ)
Reserves to cover vacancy costs: $90 (6% of rental revenue, but a property manager can help you to adjust that amount according to your risk tolerance)
Reserves for repairs: $165 (estimated here at 11% of the rental revenue)
Adding these costs, the total monthly expenses for this property are $1,287.
To determine the cash flow, subtract the monthly expenses from the total monthly rental income: ($1,500 - $1,287). The cash flow is $213.
Depending on your goals and comfort level, $213 could be plenty of cash flow for that property. However, if it’s not, working with property management experts in Detroit can help you reduce costs and maximize cash flow!
Before closing on a property, ask some important questions, like “how much can I rent my house for” and “how much cash flow do I need?” If you’re not sure how to find the answers to those questions in a way that supports your long-term goals, a Detroit property management company can help!
Own It Detroit has the experts rental property owners need to identify properties that will deliver excellent cash flow, then manage those properties to help you reach your goals. Reach out soon to learn more about our property management services and how we serve investors in the Metro Detroit area.
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