Rental Property

[Corey Schwab]

How do I get started with investing in a rental property in Burlington, VT and make sure that I can guarantee a positive cash flow until the property is paid off?

[Jon Holdman]

Sorry, Raquel Barela, but that simple analysis is seriously flawed. To the point where an investor will be seriously hurt. That analysis:

cash flow = rent - PITI

is, IMHO, one of the "big lies" of rental real estate investing. There are many, many other expense beyond taxes and insurance.

As crude as it is, the "50% rule" will give you a much more realistic estimate of your cash flow. This rule of thumb says that vacancy, expense, and capital improvements will, over time and many properties, average out to 50% of the gross scheduled market rent. From the remaining 50%, you have to pay your mortgage payment and take your cash flow. So, a better estimate of cash flow is:

cash flow = (rent * 50%) - P&I

Just the P&I part of your mortgage payment here.

Now, a significant chunk of that 50% is property management. Around here, PMs charge 10% of collected rent plus half a months rent to fill a vacancy. With one vacancy a year, that amounts to 14% of your gross rents. That drops the 50% to 36% and leaves you 64% for the mortgage payment and cash flow:

cash flow = (rent * 64%) - P&I

Now, realize you're buying a job here. Property management is a real job. Truly, its not a lot of work, but it is some work. And, when it needs doing, you have to do it.

An additional rule of thumb is the lenders rule. When determining cash flow from a rental, a lender will use this formula:

cash flow = (rent * 75%) - PITI