| So, how do you calculate positive cash flow on a | | | | property (not including the mortgage payment). |
| real estate investment? Are you saying that cash | | | | So, if you had a $1,000 per month rental income |
| flow is the difference between the monthly rent | | | | and subtracted the taxes, insurance, a reasonable |
| amount and your mortgage payment? If so, | | | | estimate of the effect of vacancies, maintenance |
| shame on you. | | | | and management, the number you are left with is |
| There are more expenses to running a rental | | | | your net operating income for that property. |
| property other than the mortgage payment. Most | | | | If we calculate this number first, we can use a |
| banks use 75% of the monthly rent amount as a | | | | financial calculator to determine what the most |
| guide for what they believe to be a better | | | | debt a property can support with that monthly |
| indication of what you'll actually take to the | | | | payment and the interest rate we can borrow at. |
| bottom line. For example, if the monthly rent is | | | | If the amount we can borrow is greater than the |
| $1,000 per month, they will say that you have | | | | purchase price (minus whatever we are prepared |
| $750 per month of income. | | | | to use as a down payment), then we can |
| So, where does that other 25% go? Well, it goes | | | | honestly say the property looks like it has a |
| toward maintenance, vacancy, management, | | | | positive cash flow. If it is lower than the purchase |
| taxes, insurance, legal, accounting and the other | | | | price, then we know that we need to put more |
| expenses you would from running a business-and | | | | money down or that we have a negative cash |
| don't be fooled; real estate investing IS a business. | | | | flow which is really, in my mind, like making a |
| There is a calculation that is used often in | | | | down payment over time. |
| commercial real estate investing that a few of us | | | | So, next time you do your analysis of an |
| have adapted to the residential real estate | | | | investment property, I encourage you to do your |
| investing world: net operating income. | | | | own net operating income calculation to determine |
| Net operating income calculations involved | | | | the cash flow on the potential real estate deal. |
| determine what the true income is from the | | | | |