When you’re looking at investment properties to rent out, you’ll probably be tempted by gorgeous rental buildings with a plethora of amenities, great location, and good views. But at the end of the day, the actual buildings or houses you buy don’t matter so much as what you're getting out of them. What you need to be calculating—beyond desirability—is the potential cash flow of each property. It isn’t an easy number to come by, especially when you’re dealing in speculative estimates, but it’s a vital one to know before you make a purchasing decision.
If you’re just breaking even on a property, it’s not worth purchasing. In fact, it’s a completely bad investment, because you’ll end up paying for repairs, maintenance, and other unexpected expenses—and then your income plan turns into another bill. If you’re making a small surplus each month, you’re still not in the green, given the taxes and costs of property management.
So how do you calculate your potential income on a property you’re considering? How do you make sure you’ll have the cash flow to ensure this is a positive investment? We’ve got the answers and the tools you need.
Calculating Cashflow for Potential Rental Property Purchases
By far, the easiest way to ensure a property is a good investment is using a cash flow calculator like the one offered in Rental Investor's software. Software like this allows you to take all of the many facets of income into account and make an informed decision before you sign on the dotted line and become the (hopefully) proud owner of a property.
Calculating rental cash flow involves looking at all of the different streams of income and expenses involved in a property. On a basic level, these are:
- Rental income
- Operating expenses (taxes, maintenance, insurance, etc.)
- Capital expense payments (roof, heating and A/C systems, etc.)
- Mortgage payments
- Income tax payments
- Paying equity partner, owner, etc.
You’ll notice here that there are a lot more opportunities for cash to come out of your flow than into it. Your potential rental income needs to be significantly above all of the other expenses you’ll have. Net Operating Income (NOI) is the number you’re looking for: it’s the formula that calculates your cash flow by subtracting expenses from your income.
It’s vital that you remain conservative in your cash flow estimates, overestimating expenses and underestimating income. For instance, you could run into a scenario where you’re dealing with a vacancy for a few months out of the year or have extensive damage to repair after a rash of irresponsible renters. If you don’t take these expenses into account, you’ll end up with a liability on your hands instead of an investment.
When you’re choosing a property for a potential investment, cash flow is the bottom line: it’s the most critical factor to consider. Rental Investment software helps you make the right decision, track expenses, and ensure your properties are continuing to offer a positive cash flow. Try your free trial today.