Written by teh_homepwnerer
What is Positive Cash Flow?
Ok, so your a l33t hax0r and can find anything on the internet right?
How come you still don't have a positive cash flow on your homes? You have the wrong idea about what it is - maybe. Or, could you just be in the dark altogether.
What is positive cash flow?
Positive cash flow is when your total calculated gains outnumber your expenses. By properly calculating your risk in purchase, you can determine your potential positive cash flow.
If you didn't get the home for 60 cents on the dollar or have some crazy good cap rate, your probably not doing so hot. Ya, you may be in the black (black means positive territory.. heh) but did you calculate your risk, review your expenses and leave wiggle room for repairs, rent loss and maintenance? Didn't think so.
Lets break this down for the slow ones.
What are my expenses on a rental property?
When purchasing a property (whether its to rent out or flip), you need to determine ahead of time whether it will produce a profit. To do this, you need to determine what your expenses will be. Lets break these down a bit, so you can actually understand what I'm talking about.
Property Taxes - This is determined by the local government to be a property tax based on the fair market value of the property. It is common to determine the annual property taxes on a home and divide that by 12 to get the monthly tax expense.
Homeowner Insurance - This provides casualty insurance to a homeowners property in the case of damage to the home as well as liability for injury or damage caused to another person. In most cases, you can call your local or national insurance companies to get a quote for monthly insurance. This should be used to determine your monthly insurance rate.
Utilities -The utilities you will be responsible for while owning an investment property can range from your monthly calculated Homeowners Association fees, water, electric to grounds keeping or pool maintenance. These fees should be included in your monthly expenses.
Property management Fee - Whether your managing your own home or you have hired a company to do it for you, always calculate a fee of at least 8-10% of the monthly rent into your expenses. Even if your managing the house yourself - you need to pay yourself for doing this. Even if your a little nooblet.
Maintenance cost - Always.. I repeat - Always add in a maintenance cost into your monthly expenses. Whether you have a new house or even a fairly older one, you will always be hit with unwanted expenses. Plan for this now, so you don't get stuck with it later. If a water leak appears or some major electrical problems, you will have peace of mind knowing there is money set aside for this.
Mortgage Payment - This is a lien on a real estate purchase that secures a loan to the customer which is paid back to the lender in monthly installments. This fee will typically consist of the Principal and Interest payments that results in a amortized loan. Your monthly fee will be included in your monthly expenses as well.
Rent Loss - This is the out of pocket expense the owner incurs due to property damage and vacancy. Usually results in 1-3 months of lost rent income during tenant turn-over. At a bare minimum, 1 month of rental income should be calculated as rent loss. Plan on this happening ever time you re-lease your properties!
So.. how do I make a profit?
What is my monthly Profit when owning an Investment Property?
To determine your monthly profit on your investment you just need to subtract your total monthly expenses from your total income on the property.
For example: If you calculated your total monthly expenses (property taxes, insurance, utilities, management fee, maintenance, mortgage, rent loss) to be $1345.00 and you determined you could rent your house out for $1400.00 even in a slow market, your total yield or cash flow would be $65.00 a month.
A measly $65.00!! Ya, thats it Noob.
Look on the bright side. You still get to depreciate the home, appreciate the value and get some great tax benefits. Yay..
I got homes to pwn.