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An Example of Real Estate Cash Flow

Although I receive emails all the time asking me questions about how to make money in real estate, it never seems to amaze me how you Noobs can't get the concept of cash flow. 

So.. For all your enjoyment.. 

MailBagDear Pwn Homes.  Even though I'm sure I will regret asking, can you please explain to me how you cash flow a property?  I have read rich dad poor dad and a few others and have read your blog for a few months now, but I just don't see how breaking even or how its even possible to cash flow when most houses can't be bought for as cheap as you say.   -Sarah

No matter how many times I try to beat it into you Noobs head, some of you just can't grasp the concept of cash flow. 

Real Estate is cash flow dependent.  Without cash flow, your business of owning and investing in real estate will be moot unless you are wholesaling or flipping, which is not real estate investing.  Having cash flow is important for two reasons:

#1.  Cash flow assures the investor of increased net income which can provide a viable buffer to cover maintenance, repairs, and rent loss.

#2.  Cash flow can provide incrementally increasing passive income.

I've decided to run a query as if I were looking for an investment property just to show you what it may look like if you were to research an investment property and what you may see.

In the below screen shot, you will see that I identified a property that sold for $79500.  This home is on a golf course and based on other recent sales, this house is worth about $115,000.

cash flow deal mls

In the next snapshot, I did a comparable market analysis that can show you what this home and others like it have sold for recently.  This can help justify your purchase price and also show the equity captured at purchase.  You can see from the CMA that this house sold for $79,500 but the average sale price was about $125,000.  This particular house is worth about $115,000, so the equity captured is $35,000. 

One thing that is good to remember about equity capture is that it is not realized until the property is sold; so if you held onto the home for an extended period of time this could be less or even significantly more depending on market conditions for this location.

Another thing you will notice on this home sale is that it was under contract within 3 days of listing - this is important to know because most good deals do not stay on the market for more than a few days.  If you are going to find these type of deals you need to enlist Realtors to help you or have MLS access unless your finding your properties by marketing through newspapers or driving neighborhoods.

  cma of deal


Now that we know what the home is worth and we see that the sale price of $79,500 is a deal worth taking we still need to know if the rents will cover the debt service.  In the next snapshot, I have figured the principal, interest, taxes, and insurance based on a 8% interest rate for 30 yrs. 

We are paying $554.18 for debt service, $275.00 for property taxes, $73.33 and $66.67 for insurance and I even threw in $29.17 for monthly HOA fees.  This gave us a total of $998.35. 

So, if it's going to cost us 998.35 at a minimum to maintain this property, we need to know if the rents for this home can support it.  If not, you have to decide whether it will be a viable purchase and determine your exit strategy for the short term since it will not have adequate cash flow.  If it does meet and exceed the cost of debt service, does it also allow for maintenance costs, rent loss, and even marketing - to name a few costs.

mortgage fees

So, lets take a look at the market and see what the rents look like for this home.  In the analysis of the below screenshot, the homes we ran comparison on are a little smaller than our subject, but as long as they are within 100-200 square feet, this is ok to use for comparison.

We can see that the average rent is $1040.00 a month.  This does meet our requirements for paying our mortgage but again, does it account for the maintenance, rent loss or any other fees we may have missed.  No. 

If you notice, the average days on market are about 78.  This means that the average time this home might sit on the market without being rented is 2.5 months.  You could significantly lower that by dropping your asking rent price, but will this affect your cash flow and will you be able to still cover your debt service?  These are things you must know.




In our final screen shot, we have to put all the number together to see if it will cash flow.  You can see the calculations below.

Our monthly cash flow is $51.66 dollars.  Keep in mind that some of these numbers were inflated a bit, but you should get the idea.

Also, this calculation did not take into account for the rent loss, maintenance, and management fees.  I would add about 15% into my calculation for this, which would actually put us into negative cash flow. 


cash flow calculation

Now.  Lets talk a bit about why this is still a good deal.  Contrary to what most would think based on the fact that it does not cash flow, its still has many aspects to the deal that would benefit most investors. 

For one, there will be $3,000.00 a year in depreciation deductions and we have managed to capture more than $35,000 in equity.  Not only that, although this home does not cash flow with maintenance, management, and rent loss included - it does cash flow based on rents minus the debt service.  This will give the investor time to hold the property for 1 to 3 years with minimal costs and they should be able to sustain.

A deal like the one above is not for the beginning investor and can even be a close call for the experience investor as well, but being able to identify a good deal should meet the requirements of the investor and not just meet the math specifications that they may be trying to meet.


Comments (1)add comment

Devery Craywill said:

This a case study?
I was wondering where this home is and is this sorta like a case study on something you bought or is this something you found that was purchased? I see how you came up with your stats, but I would just like to know what house it is so I can verify it.
January 25, 2010
Votes: +0

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