Invest an hour or two to learn how to accurately calculate rental cash flow<\/a>, and you\u2019ll never make a bad investment again!<\/p>\n When you have accurate data to work with, you can run the numbers and predict your returns on a rental property. The calculations only require third-grade math, but the end result is only as good as the numbers you plug in.<\/p>\n This is why you need to know how to collect accurate data in the first place.<\/p>\n No matter what kind of real estate investing you do, it all starts with understanding local property values.<\/p>\n If you flip homes or invest using the BRRRR method, you need to know how to estimate the after-repair value<\/a> (ARV) of a property. Get it wrong, and you could lose money rather than earn it.<\/p>\n Imagine you plan to buy a property for $100,000 and put $50,000 into renovating it, with another $25,000 set aside for carrying costs and both rounds of closing costs. If you estimate the ARV at $210,000, but you get it wrong and the real ARV is only $170,000, then congratulations! You just wasted months of hard work just to lose $5,000.<\/p>\n That miscalculation affects you just as much if you\u2019d planned to refinance and keep the property as a rental. The lender will offer you a far lower loan amount, which may not cover your needs.<\/p>\n Learn how to review comps, and always get at least one or two second opinions from disinterested third parties. With thousands of dollars on the line, don\u2019t guess\u2014know<\/em>.<\/p>\n The same comp analysis logic applies to rents. You need to know exactly what the property will rent for, before sinking a penny into it.<\/p>\n Say you take out a loan to buy a property, paying $450\/month in principal and interest. Your non-mortgage expenses come to another $450\/month (more on that calculation later).<\/p>\n At $1,000 rent, you earn a modest profit. At $850, you lose money every year. That\u2019s called a liability, not an asset.<\/p>\n Master the science of analyzing fair market rents<\/a>. Again, get second opinions from other local investors, property managers, and real estate agents. Your own forecasts, particularly as a new investor, can be tainted with green-colored lenses; recognize the risk and have the maturity to ask for others\u2019 opinions.<\/p>\n Related:<\/em><\/strong> Rental Property Numbers So Easy You Can Calculate Them on a Napkin (With Real-Life Example!)<\/a><\/em><\/p>\n Rental properties are long-term investments. Even if you estimate today\u2019s rents precisely, market conditions change, driven largely by local demand for housing.<\/p>\n Fortunately, demand can be measured. To get a sense of the trending direction and speed, look at recent population growth.<\/p>\n Make no mistake, it\u2019s a past-oriented metric. As investment brokers love to point out, \u201cPast performance is not indicative of future results.\u201d But it gives you a sense of the current population change trend.<\/p>\n Not convinced of the importance of population trends on real estate? Baltimore\u2014where I’m from\u2014was once home to a million residents. Population then shrank for decades, due to rising crime rates and corruption. Today, around 600,000 people live within city limits, occupying only 60% of its housing capacity.<\/p>\n As you can imagine, it has the most affordable real estate of any city of its size along the East Coast \u201csuper-metropolis\u201d corridor.<\/p>\n Check the Census Bureau<\/a> for official numbers, but you can also find population growth and other real estate-related data<\/a> elsewhere online.<\/p>\n If population growth serves as a lagging indicator of housing demand, job growth comes closer to an indicator of future housing demand. The line from Field of Dreams<\/em> rings true when it comes to unfilled jobs: \u201cIf you build it, they will come.\u201d<\/p>\n You can find (somewhat) recent job growth data from the Bureau of Labor and Statistics<\/a>. But keep an eye out for other sources of local job growth statistics<\/a>, as well.<\/p>\n People follow jobs. And when they show up, they\u2019ll need a place to live, the influx of demand driving up values and rents.<\/p>\n Another indication of housing demand, you need to know a property\u2019s vacancy rate as a rental property expense<\/a> for calculating cash flow. While the citywide vacancy rate matters, you should drill down to the neighborhood level to plug into your rental cash flow calculator<\/a>.<\/p>\n You can check official home vacancy rates, of course, through the Census Bureau and other sources. But often you can get a better current sense for a neighborhood\u2019s vacancy rate from other landlords, property managers, and real estate agents who work there.<\/p>\n As a new investor, I\u2019d be wary of any neighborhood with vacancy rates over 5%.<\/p>\n Related:<\/em><\/strong> How Data Analysis Can Make You Rich in Real Estate Investments<\/a><\/em><\/p>\n I cringe every time I hear a new investor say, \u201cWell, the rent is $1,500, and the mortgage is only $1,200, so I\u2019ll make $300 cash flow every month!\u201d<\/p>\n That investor is about to lose their shirt.<\/p>\n As a general rule, rental properties come with non-mortgage expenses that add up to around 50% of the rent (known in the industry as the \u201c50% Rule<\/a>\u201d). Those expenses include, but aren\u2019t limited to:<\/p>\n And don\u2019t tell me you don\u2019t have to account for property management fees, since you plan to manage the properties yourself. That works great\u2026 until you take a new job and don\u2019t have time, or give birth to triplets, or just can\u2019t take another phone call from a tenant asking you to screw in a new lightbulb for them. For that matter, you may simply reach the maximum number of self-manageable rentals<\/a> and run out of hours in the day.<\/p>\n All of the above are ongoing costs, and say nothing of one-time costs. For example, if you buy a fixer-upper, you\u2019ll have renovation costs. You need to accurately estimate the HVAC costs<\/a> or fire damage restoration<\/a> costs or whatever else it takes to rehab the property.<\/p>\n Then there are the closing costs, both on the front end when you buy and the back end when you sell. You\u2019ll have lender fees, title fees, government recordation fees and transfer taxes, real estate agent commissions, appraiser fees, and beyond.<\/p>\n You need to know how to forecast them all, if you want an accurate prediction of your returns.<\/p>\n It\u2019s intimidating at first, looking at all these numbers. Fortunately, there\u2019s a quick way to move past that initial overwhelm: get familiar with them.<\/p>\n To get a sense for how rental expenses impact cash flow, play around with a rental cash flow calculator until it becomes intuitive. Try different prospective properties, different prices, different scenarios.<\/p>\n Spend a half-hour researching the population and job trends in your target market. Ask around about vacancy rates. Research local comps, both for home prices and rents. As my old friend used to say, \u201cIt\u2019s not rocket surgery.\u201d<\/p>\n Familiarity doesn\u2019t breed contempt; it breeds comfort.<\/p>\nCrucial Data Points<\/h2>\n
Property Values<\/h3>\n
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<\/p>\nMarket Rents<\/h3>\n
Local Population Growth<\/h3>\n
Local Job Growth<\/h3>\n
![\"Young](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/09\/clean-rental-main-702x336.jpg\" "\\"\\"")
<\/p>\nLocal Vacancy Rate<\/h3>\n
Other Property Expenses<\/h3>\n
\n
Get Past the Intimidation by Familiarity<\/h2>\n
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<\/a><\/p>\n