Profitable Rental Property - Calculate Your Cash Flow

I am sure, that investing in real estate is just not a leisure option for you, but the rather concrete aim is to make some money and a way to do it (as observed by many) is by ensuring a positive cash flow from rental property. Many so called experts in this field are of the opinion that it is a rather easy task and another way among various others to make some fast money in real estate world. In the same direction the market is flooded with very many hi tech software programs offering you the latest means to calculate your cash flow and invest accordingly. 

All this and many more advices offered during various seminars organized by management groups and those drafted by carefully pitched salesmen have in fact made you give this option a very serious thought. You are now willing to spend a few thousand to make triple the amount. But before you actually are ready to jump into this arena, my advice to you is that study the entire argument with an open mind and jump only if you are sure that you can swim across.

The Key Hurdles

Before the trigger of a gun indicates the start of a race, the competitor who aspires to win, makes sure that he has studied all the hurdles that he needs to cross as closely as possible. So before you dive in calculate and analyze all the expected hurdles namely, the operating expenses, the mortgage expense (i.e. the payable interest charges) and the expected value of the property after a specified period of time. 

The operating expense entails the cost of maintaining a property. Higher the said amount, lower is your capitalization rate which is not something you are looking forward to. This in fact is one aspect were the majority falters. The brokers who are simply interested in making sure that the deal materializes will be happy to inform you that this expense is minimum, could be as low as 30 %. However, this figure is far from reality which for residential properties in US is calculated to be around 45 %. This straight forward difference is a major eye opener. This gap i.e. approximately 15 % can easily ensure that you end up having a negative cash flow at the end of the year. So while making your calculations be cautious about the expense rate you pick. If you plan to share you operating expenses with the tenant, than obviously, expect a lower rent in return. This implies lower overall income and a poorer capitalization rate which is calculated as annual net operating income divided by its price, and the net operating income stands for gross income less operating expenses. 

Mortgage payments and depreciation on the value needs to deducted as an expense to calculate your cash flows, while the rental part leads to the income figure. Another common pitfall here to avoid is calculation of income based upon increased projected rents rather than using the current statistics, which are indicative of the true picture. Further lower the loan on the mortgage property lower are your expenses and resultantly a positive cash flow. 

The Outcome

A careful assimilation of true figures and their rightful usage can give you clear details about the expected a cash flow. Intelligent investment decisions demand positive cash flow, while a higher expense side arising either from higher mortgage rates or operating expenses or depreciation can lead to a negative figure which is certainly not desired. Yet another eventuality that prompts investors to invest in a rental property despite a probable negative cash flow arises out of appreciation hopes. 

Though you’re diligent calculations can only determine you profits, however few selected situations like depressive economy and special purchases like foreclosures certainly are more specific indicators of associated promising cash flows from rental properties. Just for the understanding part of it, imagine you as a resident of depressive economy looking for a shelter. Weakening prospects are against buying a house and the commonsense would certainly suggest renting out even if that implies paying higher rent. The net result, the investor makes positive cash flows. The other scenario i.e. one of a foreclosure or a bargain deal (the more common one) implies a lower loan to value ratio and therefore a lower expense side. Again the situation is of a positive cash flow. The property is a good investment venue. Positive cash flows are a reality, but only if you deploy your basics right.

 

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