2 Calculations All Rental Owners Should Know

A few ways to determine if a rental property is a good investment.

Have you ever thought about investing in a rental property? Real estate investments can be a great way to earn passive income, but you need to be careful. Not all rentals are the same, so you need to know how to identify which ones make sense financially. That can change based on various factors, but the main way to determine if an investment will be a good one is to run the numbers. 

The first thing you should do is figure out how much your rental income, operating expenses, and mortgage payment would be. The trickier part of this is determining what your operating expenses would be. Of course, it’s always possible for unexpected things to pop up, but here is a list of some common expenses: accounting for a vacancy, the fees of a property management company if you want one, leasing fees, repairs, insurance, taxes, utilities, etc. 

This is where the math comes in. I recommend you calculate what your net operating income and cash flow would be. For the first equation, simply subtract your expenses from your rental income, and that’s your net income! Then, take that number and deduct your mortgage payment, and that leaves your cash flow. It’s as easy as that! Plus, there are plenty of online calculators that can help you with all of this.

"The main way to determine if an investment will be a good one is to run the numbers."

There are a lot of other calculations you could run, but those are the essential ones. If those two don’t end in a positive number, run away! That property is not the right investment. This topic entails a lot of subjective and confusing things, so I recommend getting advice from an expert, and I would love to help you. 

Another piece of advice you could consider is the 1% rule. This rule says that if the monthly income is equal to or greater than 1% of the purchase price, no further evaluation is necessary, it's a good deal. For example, the property I bought in Chicago cost $70,000 to purchase and was rented out for $1,200 a month at the time. 1% of $70,000 equals $700 a month in rent, so it was a good deal. 

There is also the 50% rule, which says that you should plan on spending 50% of your gross monthly rental income on repairs and vacancies, not including your principal and interest payment. If the property rents for $1,000 per month, you should plan on spending $500 per month on repairs and vacancies. Therefore, if your other fees like property management, mortgage bills, and utilities are more than $500 a month, then this won't work. This, in my opinion, is a very conservative estimate, and it can be a good starting point to see if you want to dive deeper. 

At the end of the day, you need to decide what's right for you. Our mission statement is to help our clients build wealth through real estate, so we can help you run the numbers. One thing we do to help people who want to learn more about investing in real estate is every quarter we play a game called the cash flow game. We do this live in our office. It's a fun time and people get a lot out of it. It's a very casual way to introduce you to the concepts of real estate investing for passive income. If you'd like to join us for the next one, find out more on our website. We'll even bring the pizza. 

In the meantime, if you have any questions, let us know. You can call or email us anytime. We look forward to hearing from you and hope to see you at our next Cash Flow Game Night!