TOOLS OF THE TRADE: RENTAL PROPERTY CASH FLOW ANALYSIS
Whether its your first owner occupied multi-family home, or you are acquiring your 100th property in your portfolio, everyone should have a strong understand of cash flow and projecting rental income patterns. Savvy investors will not even look at a property that does not provide a certain benchmark of profitability on paper, or an opportunity to expand positive cash flow in the future.
Cash Flow Analysis on rental properties can be calculated as simple as monthly income minus monthly expenses, or as detailed as a multi-year business plan which anticipates vacancies, rent increases, and/or additional expenses and repairs over time. For the sake of simplicity, we will provide an example of a basic monthly cash flow analysis on a 3 unit investment property fully rented out.
Example: 3 Unit Investment Property valued at $500,000. Gross Rental Income $4,900/mo Purchased with 25% Down payment or $125,000.
Investor’s monthly operating expense includes mortgage principal & interest, property taxes, home insurance, common utilities, and a small misc. repair allocation- example $3,186.00 total expense
A basic analysis would state $4,900 - $3,186 = $1,714 positive cash flow per month.
A more detailed analysis may include the principal repayment the tenants make each month, a depreciation of the assets and the systems of the building, and even a property management fee of 5%-10% of the monthly rent. Additionally, the lifespan of the roof, driveway surfacing, or foundation may also be amortized and factored into a cash flow analysis. For example purposes, let’s use a refined monthly positive cash flow of $1,500.00
Generating profit of $1,500 monthly, the investor can also project how long until their initial investment of $125,000 was recovered ( 83.3 months) and how much the tenants may have paid off the mortgage balance in those roughly 7 years. This may give a buyer the confidence to act aggressively on a property with great potential or help a buyer to remove the emotion of a property that struggles to turn profit.
Investors & Home Owners may be able to use this trade tool to screen properties for stronger cash flow analysis, and make better projections of how to best use their capital, and when they will get it back! To learn more about Cash Flow Analysis and if this the right tool for your purchase situation please connect with Maritime Mortgage by phone at 781-341-4000 or online at MaritimeMortgage.com