The number one priority when searching for an investment property is whether or not it has a positive cash flow. Without a positive influx of money, the investment becomes a drain on funding and will eventually become a burden rather than a blessing. You may find that you even have to sell the property at a loss.
Before you finance a new investment property, it’s always a good idea to run the numbers and see if it will actually make money. But how do you know how much cash flow is good for a rental property?
Below is an easy-to-follow guide to help you decide whether or not to invest in that next rental property.
How Do You Determine What Good Means?
A good investment means a lot of different things to a lot of different people, so it’s important to define what it means to you.
One common explanation for a good investment is whether or not it can pay for itself. The rental income should be able to cover:
- HOA Fees
- Vacancy Time
- Utility Costs During Vacancies
- Management Fees if Necessary
It’s inevitable that something is going to break down or need repairing. With this in mind, your rent should reflect this added cost.
What Does a Bad Investment Look Like?
A bad property investment would be anything that has a negative cash flow. Properties that fall under this category are usually purchased at a higher price and are more difficult to rent out at profit.
If you’re looking at a rental property that has fresh paint and carpet, flowers outside, and perfect landscaping, there’s a good chance you’re going to lose money on the deal.
Turnkey rental properties have their perks, but a house or condo that needs a little work is going to sell for a lower price. In most cases, the cost to repair or remodel the property will be less expensive than the retail cost.
If you’re planning on living in the home, it’s a different story. However, from an investment point of view, you’ll be paying a premium for a rental property that is in excellent condition. You may even find yourself in a bidding war driving the price even higher.
Higher premiums don’t translate to a good investment.
How Does This Tie Into Your Investing Goals?
Everything goes back to your goals.
If you’re buying a property to live in, you might live there for ten or more years. That’s a much different perspective than someone looking for a rental property.
If you look at a rental property you must ask yourself: How much are they asking for the house, and how much can I realistically make from rent? If the asking price is too high, you’ll never be able to recoup the costs from the rent.
What’s the Easiest Way to Calculate Cash Flow For A Rental Property?
The easiest way to calculate cash flow is to add up ALL your expenses and deduct it from your potential income.
This seems like a fairly straight forward process, but there are some things people forget to add in their calculations.
One of the things people often forget is the high cost of a vacant property.
Vacancy time can be difficult to plan for, and it can also be costly. Until you find a tenant, you still have to pay for the mortgage, electricity, yard work, water, heat, etc. These expenses can add up and cut into profits.
A vacancy is also lost income. Losing a whole month of rental income can completely throw off all your numbers no matter how diligent you were with everything else.
How LEAP Helps Investors Stay Cash Flow Positive
Fortunately for our clients at LEAP, it takes us an average of 16 days to rent out a property. This saves our clients a lot of lost income, so they can start making a return on their investment.
We’re able to make these quick placements because we:
- Price the rental realistically. It’s essential to price a rental property at a reasonable price. That isn’t to say you should price it below average. You still want to make as much profit as possible. However, properties that are priced well above the norm sit vacant for longer periods of time. Vacancy times eat into your estimated profits and should always be avoided.
- Offer a good product. It goes without saying that renters want a property that is well maintained and in good condition. We make sure that the properties we manage are tenant-ready before new renters move in.
- Have a solid marketing system in place to find tenants. We have a great marketing system in place that really works. Our marketing system brings in a lot of applicants and we use our screening process to choose the most qualified tenants.
- Use a rigorous tenant screening process to choose quality tenants. Having a good tenant means your property will continue to generate income each month. A good tenant is less likely to pay their rent late and more likely to stay in your rental longer.
Is the Investment Property Right For You?
Before you invest determine your goals. Once you know what they are, run the numbers and run them again. Use realistic numbers that include all your expenses.
You’ll know how much cash flow is good for your rental property when your calculated profit is higher than your projected expenses.
If you need help placing a tenant or managing a property, contact us today.
With our years of experience and expertise in the field, we can help place the right tenant for you. With the right property and the right tenant, your real estate will be a great cash flow investment.