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The lowest I would want to see on a residential rental property in this market is 8% and even then, there better be a good reason it’s that low (property in a “sexy” market, highly desirable area, etc.). The lowest cap rate I would ever want to see for any property, whether residential or commercial I don’t care is 6%. NOTE: I don’t include the mortgage payment in this calculation. Net Annual Income / Purchase Price = Cap Rate It basically compares the return on investment (ROI) to the purchase price. Cap Rate– This gives you an idea if you are buying the property at a good deal.Calculate the Returns: Two numbers I want to see on any property I evaluate are the Cap Rate and the Cash-on-Cash Return. Subtract the Monthly Expenses from the Monthly Rent (= Net Income): This is your monthly cash flow. Use your judgment on deciding what % to use for your estimate, but don’t overestimate the quality of your property and estimate too low.ģ. If the property is not in top shape, conservative could mean closer to 25%. If a house is a turnkey property or recently rehabbed and gets a good report from the inspector, I use 5% of the monthly rent. Just like with vacancy, I err on the side of conservative. Repairs– Again an estimate but should not be left out.I still use 10% no matter what just to be sure I have a conservative margin. In situations where you have a rockstar property manager or your tenants are under a lease option, the actual % should be much less. Vacancy– I conservatively estimate 10% of the monthly rent towards vacancy expenses.If you only know the annual fee, divide by 12.ĭon’t skip out on finding out what the actual HOA is! The HOA can absolutely kill a property’s cash flow. The seller or agent may know the number already, but if not you will have to call the HOA of the neighborhood. HOA– This can be tough to find sometimes.Confirm with your lender what your down payment and interest on the loan will be to ensure you are using accurate numbers for your calculations. Mortgage– Use an online mortgage calculator to calculate the monthly payment.Property Management Fee– Usually around 10% of the monthly rent.Insurance– Get a quote from an insurance provider.Property Taxes – Look on Zillow or another online source for the most recent annual tax amount and divide by 12.
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Yet so many people don’t think to include them in the expenses. Don’t forget vacancy and repairs! They are a real part of any property investment and they can drastically affect the cash flow. Figure out the Monthly Income (Gross Income): This will either be rent the current tenants are paying, the asking rent (confirm this number is realistic), or if you have neither of those you can talk to a local property manager or real estate agent who can give you a market rent value for the property.Ģ. Calculate the Monthly Expenses: These include property taxes, insurance, property management fee (if applicable), mortgage or financing (if applicable), homeowner’s association fee (HOA) (if applicable), vacancy and repairs. Unless you are a trained psychic on the crystal ball, then predicting appreciation may be easier for you than estimating cash flow.ġ. In fact, the numbers can be one of the easiest parts of shopping for a property. People make running numbers out to be so complicated sometimes it’s a no wonder more people aren’t involved in real estate. What determines cash flow? Income and expenses. What numbers do you run? Well, what should any investor care most about? Cash flow. If they don’t, awesome, you didn’t waste time on other stuff. Save yourself some time and before you do anything else, run the numbers and see if they work. What do I do, what do I look at, how do I know if it’s “the one”? There are several things I do and look at with any new property potential, but the most important is the numbers. One of the biggest questions I’m asked is how I go about a property once I find it. For good or for bad, ‘til death do you part, never leave the numbers. In this industry, you must love the numbers.