Friday, April 23, 2010

Cash Flow Analysis for Landlords

One of the most important parts of being a "REAL" investor is to make sure your property is REALLY making money. If your property doesn't cash flow, or if you have to dump a pile of money into it at the purchase to MAKE it cash flow, you're doing nothing more than pretending you're an investor.

The name of the game is for you to make money. Enough money to cover all operating expenses including the properties mortgage, long term repairs such as the roof, a hot water heater, the furnace. Expenses such as property taxes, insurance, property management if you have it, painting between tenants, etc. Also all of that stuff that you may not consider such as advertising expenses, attorney fees from time to time, lawn care, Roanoke rental inspection fees, office expenses, pest control, snow removal if you do it, water, dump fees, vehicle expenses, etc.

The 50% Rule Of Thumb

When determining cash flow one should factor 50% of your gross rent to cover operating expenses. The 50% rule is nationally accepted by many as a general guideline of the expenses to operate a rental property. A recent study by the National Apartment Association of 30,000 units all across the United States in every rent range has confirmed this. Larger studies with hundreds of thousands of units have also shown it. The rule is not absolute, obviously if you had a brand new house you would have a decrease in some repair costs, etc. But keep in mind that to get that percentage, there are properties that are well over 50% as well as ones under. Also keep in mind that there is less maintenance on 1 apartment building with "10" units under 1 shared roof that has 4 shared exterior walls than 1 single family house with 1 roof and 4 walls.

And in regards to the term of your loan, I strongly suggest that a landlord take no more than a 15 year note on a property. After-all, you are in this to make money for yourself, not the bank. A 30 year note will leave you with interest payments of more than double your original purchase price. About half for a 15 year mortgage.

Here is an example of a quick determination of cash flow based on profit per door on a triplex I bought. I use this formula on every house I buy along with my rent X 30 minus repairs formula in determining it's value. The big question is will the property cash flow or will it not,,,,which is obviously very important. Many investors want a minimum of $100 cash flow per door per month. I look more to a debt coverage ratio ideally from 2.0 or above because I take no cashflow from my property and make double payments which will pay off a 15 year note in 5 and a few months if you have at least a debt coverage ratio of 2 or more.

This formula is based on a 100% loan as if you were going to pay yourself back for what you put down on it too which is what a wise investor does.

Gross Income: $1,515/mth = $18,180 annual
Expenses (50% rule of thumb) -9,090
NOI: (net operating income) $9,090
45,000k @ 6.25% / 15yrs: -$4,630 Use these terms on . Take total purchase price and total interest from the amortization table and add the two. Then divide by the number of years you will have the loan and you will have the amount you will pay per year listed above. (or just multiply the monthly payments by 12 and you will have the same number) Then subtract it from your net operating income (NOI) and you have your yearly cash flow. Then divide the yearly by 12 for monthly and divide it by the number of apartments for the cash flow per month per door.

Yearly Cash Flow $4,460
Or, $371 per month or $124 per door @3 units

And here is an example of the last single family house I bought that is finished with rehab and is rented.
Gross Income: $783/mth = $9,396 annual
Expenses (50% rule of thumb) -4,698
NOI: (net operating income) $4,698
16,350k @ 6.25% / 15yrs: -$1,682
Yearly Cash Flow $3,016
Or, $251 per month

Now run you own scenario pretending that you are paying the monthly rent X 50 and see how the cash flow analysis turns out. You will see that you are at or just above a break even point.


Post a Comment


Real Estate Investors of Virginia. Copyright 2009 All Rights Reserved