Cash Flows From Investing Do Not Include Cash Flows From: Real Estate Investing for Cash Flow

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Real Estate Investing for Cash Flow

So how do you calculate positive cash flow from real estate investing? Are you saying that cash flow is the difference between your monthly rent and your mortgage payment? If so, shame on you.

There are more costs to managing a rental property than paying the mortgage. Most banks use 75% of the monthly rent amount as a guideline for what they believe is a better indicator of what you will actually pay. For example, if the monthly rent is $1,000 per month, it will say you have $750 in monthly income.

So where does that other 25% go? Well, that goes towards the maintenance, vacancy, management, tax, insurance, legal, accounting and other costs you’d incur from running a business – and make no mistake; real estate investing IS a business.

There is a calculation often used in commercial real estate investing that some of us have adapted to the world of residential real estate investing: net operating income.

The net operating income calculations included determine the actual income from the property (not including mortgage payments).

So if you had $1,000 in monthly rental income and subtracted taxes, insurance, reasonable vacancy impact assessment, maintenance and management, the number you’re left with is your net operating income for that property.

If we calculate this number first, we can use a financial calculator to determine the maximum debt a property can handle with that monthly payment and interest rate we can borrow at.

If the amount we can borrow is more than the purchase price (minus what we’re willing to use as a down payment), then we can honestly say that the property looks like it has positive cash flow. If it’s less than the purchase price, then we know that we have to invest more money or that we have negative cash flow, which is really, in my opinion, like paying down payments over time.

So the next time you’re doing a real estate investment analysis, I encourage you to do your own net operating income calculation to determine the cash flow of a potential real estate deal.

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