I was recently speaking with a new investor (let’s call her Maya for simplicity) who is looking into acquiring single family homes as rental properties. The conversation we had about her expected net positive cashflow on a particular property reminded me that it’s so important to understand the basic mathematics for real estate to ensure that you know what you’re getting yourself into.
Maya forgot (or was simply unaware of) several of the basics when calculating expected cashflow on her single family home investments. This could have led to a less than desirable scenario for sure — it could have been the difference between having a positive cashflow or a negative cashflow.
In case there are others like her who are thinking about getting into their first rental and trying to determine cash flow, I thought I would share the things that she did NOT account for because these are likely easy items to forget.
Maya did not intend to hire a property manager which is perfectly fine, but it’s important to include property management as part of your expenses anyway. You never know when you may change your mind and want (or need!) to hire one, so it’s safest to include this expense. In many markets, this cost would be 10% of the expected rent, but you’ll want to figure out the standard for your area.
It’s easy to access the property taxes for a property with a quick online search of public records. Maya did just that, but there was a little problem with her calculation. Florida is a homestead exemption state like several other states within the U.S. Every person who owns and resides on real property in Florida and makes the property their permanent residence is eligible to receive a homestead exemption which makes up to $50,000 of the property value exempt from taxes!
Needless to say, the property taxes were going to be significantly higher for her as an investor. Be sure to get an accurate property tax estimate.
You can’t exactly expect to have zero vacancy with your rental property. If you’re purchasing a vacant property, you have to consider that there could be several weeks delay in getting a tenant in the property. She didn’t consider the fact that there’s no cash flow happening when there is no tenant! You also want to account for the cost of advertising and marketing the property to potential renters, including the costs of credit/background checks if applicable.
There are small maintenance items that can easily be forgotten but need to be accounted for. She certainly gave thought to estimated repairs, but forgot about those regular things that are done such as bi-weekly lawn service, exterminators, etc. For those in cold weather climates, things such as shoveling snow may be a consideration.
Maya is still enthusiastic about purchasing rental property and fortunately she’s learning to do the right math before she gets herself into a sticky situation. Perhaps this post will help other new investors to do the same!
Editor’s Note: If you’re interested in reading more about the average expenses of a rental property over time, please be sure to check out the 50% rule as discussed many times on our forums.