Help to understand cash flow

7 Replies

what is considered a good return on a rental investment?

I am considering a deal but not sure if the numbers are decent to even bother.

Purchase price: $50K

Yearly rental income: 15K

Yearly HOA: $3K (all landscaping, HVAC & exterior maintenance included)

Yearly Taxes: $700

Yearly Insurance: $450

Yearly PI: $3960

Yearly Avg expenses: $1.5K.

Not sure how to calculate the vacancy.

Rental Income - HOA - Taxes - Insurance - PI - Expenses - Vacany Allowance? = 5390

5390/12 = 450 per mnth CF

What am I leaving out?

I plan on using 2 loans to purchase, as one loan will be an equity loan from another property, which I will use as a down payment.

What is a good percentage for determining cash on cash investment?

A quick and dirty calculation for cash flow is rent / 2 - P&I. For a $50K loan at 5% for 30 years I get P&I of $260. I think your rent is $1250. So, half that is $625. Less P&I is $364 a month in cash flow. Nice deal.

You've missed a bunch of expenses. Legal, CPA, tenant damage, maintenance, long term capital improvements, to name a few.

Sounds like a decent deal, is this your first? 300+ net CF on 1 SFR is good.

What is the ARV?

Does it need any repairs?

What's the neighborhood like?

Thanks for that info Jon.

I actually used a loan of 55K @ 6% interest to get the PI, as I initially considered 55K the purchase price.

What are the monthly legal duties that would be needed?

Using your formula, do you factor in taxes, insurance, expenses? Is that why you divide rent by 2?

He is using a 50% expense ratio, which factors in all expenses, before debt service.

oops, sorry I forgot to mention it is a duplex which does not need any repairs. Both sides currently rented. Will the info you gave still apply to a duplex vs a single family home? Would u still say it is a good deal based on these numbers?

Hi Jasmine, Vacancy & Credit Loss is computed as a percentage of Gross Scheduled Income, which I believe you stated as 15,000. A 10% allowance therefore means that you will lose 1,500 per year due to unoccupied units.

GSI - Vacancy = Gross Operating Income - Operating Expenses = Net Operating Income - Debt Service = Cash Flow Before Tax

HOA should be included as an Operating Expense. Though you stated that there are no immediate capital improvement requirements, I would also include some annual amount for Repairs & Maintenance in your Operating Expenses.

Hope this helps.

As a beginning invester in MF homes, it is typical to accept lower cash on cash. An 8% would be good for your first place, if u were okay sitting on it a while. An average would be to shoot for 20% and settle for 15%.

You want to calculate for Net Operating Income, which is gross income less operating expenses.

Then you take your NOI divide it by your cash investment.

On a single family, a 200-300+ month is good. For the most part, u treat duplexes about the same.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.