In the first two posts we learned the financials of buying right and how to calculate that. The financials are the foundation to deciding to buy a property. I’m looking to get into a good investment, that’s the whole point of real estate investing for me.
Story Time
To drill home what we learned in the last post I'm going to share a story.
Cashflow isn’t just Rent –(Mortgage+Taxes)
I have a former colleague who has a rental investment. She’s got a solid 9 to 5 job but she wanted to invest in an income producing asset.
In fact - the property she bought I had found and spoke to my realtor about, but decided to go after a different property. At that point he brought it to her attention and she ended up getting it.
It actually rented out for $100 more a month than what the comparable rents were showing. That definitely helped as I recall the financial numbers were real tight, which is why I didn’t go after it. Even at $100 higher rent, the numbers were still snug.
I’m glad it worked out for her, but at the same time I don’t like to leave things to chance. You can't assume you will get $100 more than the going market (maybe that’s the scaredycat investor in me).
Point of this story is that I ran into her about a six months after she purchased the property. I asked her how’s that unit working out?
She said "it's was going very well. I’m making about $500 a month from it."
I responded "that is awesome and glad it’s going well."
However – what was going on in my head was a but different because I ran the numbers on that property over and over again.
There is no way she could be cashing flowing $500 a month, even with rent $100 higher than I anticipated.
I know exactly how she is getting that number.
Vacancy and maintenance is not being factored in.
The standard is to factor in one month’s vacancy and atleast 5% of rent toward maintenance.
The figure you get after that is what your actual cashflow will be over the longer term because you will have vacancies and you will have maintenance!
The best part is maintenance costs seem to pop up in clusters so you better have those $$$s factored in and set aside.
Remember, you get your cash flow by taking:
-Operating Expenses = (Taxes + Insurance + Vacancy + Maintenance + Reserves)
-Debt Service
Then subtracting the total of those from your Rental Income
Rental Income - Operating Expenses+Debt Service)= Cash Flow
Your ScaredyCatGuide,
Mitchell J