Calculate Cash Flow Before Purchasing A Rental Property


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There are many ways to calculate cash flow, but the truth of the matter is that anyone of these equations is bound to supply an investor with the information they need.  Ideally, an investor should keep their cash flow calculation simple and get a general idea regarding whether a property is profitable or not.  Here we will go over how to calculate cash flow and decide whether an investment is cash flow positive or negative.

In order to calculate cash flow, we will need an equation and variables having to do with a rental property.  If the solution to an equation demonstrates that we are in the black, a profit is likely to be earned.  Since the only positive cash flow is rental payments, it should be easy to calculate, but never assume that a rental will always be 100% occupied when calculating the cash flow.  On the other side of the coin, negative cash flow will have many different streams.  Investors must account for mortgage payments, maintenance, taxes, and tenant issues.

The most basic equation for being able to calculate cash flow assumes that monthly mortgage payment accounts for 50% of the positive cash flow.  In other words, a rental property that takes in $10,000 a month in rental payments has to have a $5,000 monthly mortgage payment or less in order to even consider it as a profitable option.  At this point, more detailed analysis should be performed in order to determine the other negative cash flow streams.

Those who want to calculate cash flow should be conservative with their numbers.  Always assume that there will be hidden and surprise costs in this business.  Those who are able to calculate these costs into their analysis should be able to determine their potential profits with greater accuracy.

Investors who calculate cash flow should search for properties that pay out an 8% or more return on investment.  This means that 8% of the value of a property should be earned on a yearly basis.  Assuming this to be true, an investor should be able to earn full equity in their property in a little over 12 years.  Investors who stick with their investment for the duration of this time will eventually not have to worry about their mortgage payment anymore, as they will acquire full ownership.  A property will become significantly more profitable at that point in time.

Investors who put in the necessary effort to calculate cash flow before purchasing an investment should have an understanding of their profit margins.

Asking questions with these tips in mind will help save real estate investors thousands.  For more ideas related to real estate investing, call or visit us a Homevestorsfranchise.com.  We are the nation’s number one home buying franchise with over 15 years of experience.  Our company has a vast assortment of real estate investment and real estate franchise opportunities available to help you grow your real estate business.  Come see us for more information.

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