First and foremost, if you are looking for a steady monthly income, residential income properties are one of the best investments out there. Residential real estate typically beats other types of investments, including savings accounts, certificates of deposit, the stock market, bonds, Treasuries, gold and currency trading.
The main factor to look at for maximizing your cash flow involves your total initial investment. This includes: down payment, closing costs and initial fix up costs. The more you put down, the less your monthly cost are going to be, mostly in terms of your monthly mortgage payments.
Cash Flow Formula
Cash Flow = Operating Expenses – Vacancy – Mortgage Payment
(typically expressed as a monthly figure)
Operating Costs include such things as taxes, insurance, HOA, gardening, water, maintenance, etc. They do not include mortgage payments.
Vacancy is a dollar figure calculated from the loss of income between the time former tenants move out and new tenants move in. You can calculate it yourself for your properties from experience, or use area averages. Typically, vacancy rates are about 5% of the gross income, which equates to a property being vacant for about 3 weeks a year. That’s the starting figure we use for our calculations.
Here’s an example:
|Net Cash Flow||$862|
(Click here for the SMART Glossary)
As a landlord, you can control or influence all of these numbers to your advantage, some more than others. For instance, you can raise rents, but may or may not get them, depending on the rental marketplace. Or, you can try to keep your costs down, but you do not want to let a property deteriorate so that it is unattractive for prospective renters to live there.
This is great, but remember that putting down larger amounts, like 50% or all cash, will affect your Return on Investment. See our section on “Leveraging“.
And with condos, don’t forget the monthly HOA fees eating into your cash flow.
Bottom line: you need a complete & accurate calculator to determine the right mix of initial investment, purchase price, cash flow & ROI for your investment needs. We happen to have such a tool: our SMART Return on Investment Analyzer©. Check it out and see how well it works for you.