Determining Cash Flow on a Rental

www.rentometer.com and www.zilpy.com two good sites give you more broader prospective of rental rates in given area. Agent who handles the rental properties for RE firm in specific area will be good person to give you specific rental rates.

When doing your basic financial analysis on a potential
investment property, there are just a few numbers that
you're concerned with when it comes to the income evaluation
for determining your return. This is necessary to help you determine a "Good Buy" from a "Good BYE" when analyzing properties!

Keep in mind that this is not the total analysis, but
just a basic income/return picture. You will be looking at ARV (after-repaired-value), rehab costs, purchase price and income evaluation. This quick lesson here addresses the short version of income calculation.

In case you don't already know this, Net Operating Income is your Gross Income minus youre expenses.

Think of it just like a paycheck. If you make
$10/hour, and you work 8 hours, it's $80. That's
not your Net Income because you're going to pay
taxes, social security etc. If you deduct all those expenses,
you will get your Net Income (NOI).

In real estate, we have the Gross Income. It's all
of our income from the property-rents, parking, laundry income, anything you might collect on a particular property. That amount minus our expenses equals our NOI.

To get the NOI before the spreadsheet is filled with
actual rents from your property manager, the taxes from
the realtor, the insurance from your insurance person, we
do a quick analysis and we use a 0.65 factor.

What that means is, ff you run the property efficiently, you should net roughly 65% of the gross income. Some properties may net you a little more or less, but using the .65 factor, I typically come within 1%-2% of the actual numbers. What I do is take my NOI and multiply it times .65 and then divide that number by the price I pay for the property and that will give me my cap rate. Im looking for a cap rate of ten and above.

You need to understand the financial analysis and if a deal makes good sense or not. It's all in the numbers and the numbers don't lie! Knowing these figures is what will protect you from getting hurt financially.

Some people don't understand this, they lose money and then they say that real estate is a bad business. It's not a bad business. You will
make some mistakes but if you do this part the right way, even if you insist on calling it a risk, it's definitely a calculated risk.

Remember, The numbers don't lie. There's no emotion tied to these numbers. It is what it is. And if a deal looks great on paper, you better snatch it up before the next guy does.

Bottom line, don't forget the Cap Rate Analysis Formula, which contrary to popular belief, works with commercial AND residential properties.

The formula again, is this:
NOI divided by Total Cash Invested. It's the Total Cash
Invested, NOT the asking price. Remember, we will not be
paying the asking price. We'll be paying the numbers which
make sense for us. (Never touch a deal with less
than a 10% cap rate on single-family property. In this market
there are deals available with CAP rates above 15% all day long.

Thanks for the advise. I had heard of the cap rate formula before but I wasn't sure what a good cap rate was considered to be so thanks for some guidance on that. Also thank you for the web sites. I will look into them. My biggest concern about the RE Agent giving you the potential rental rate is that they can inflate the number to get the deal done. I am always trying to verify anything that they provide to me.

Thanks for the valuable information that you put out. Its great we all can learn from each other. Lets get our deals done so we all can share our wonderful stories so we can motivate the newbies.

Warm regards,

Paul T. La Moy

The best way for me to figure that out is asking these 4 questions:

How much am I going to rent the house out for?

How much is my monthly mortgage payment?

How much are my taxes?

How much are my utilities?

This is the formula that I use to figure out how much positive cash flow I will have after all of my expenses are paid.

Hope this helps

That is the formula I use also. Thanks for posting that information to help others. Much in success !

Warm regards,

Paul

Thanks for posting that info you're a beautiful person to all us here on DG. Does that CAP formula apply to Multi-family properties also?

Just wanted to thank you for that post sistreat. Very informative. I used it as a base to get my head wrapped around the idea of cap rates and understanding good deals. I've been studying this stuff quite a bit since reading this thread.

This threw me off for a bit but I assume you meant take the GOI and multiply times .65 to get an estimated NOI?

I'm reading from Dean's book 'Profit From Real Estate Right Now.' I'm reading about the gent that sold his truck and prized motorcycles and every thing else he had that he could sell on ebay to get the down payments to buy three properties which took two months to close. Then he ran out of money. Then he said a lightbulb went off in his head and he bought fifteen more properties in twelve or thirteen months without using any of his money. He used what Dean had said in black and white to accomplish this.

I believe he was reading one of Dean's previous books but I would love to have the information so I can jump on that success wagon. I'm sure theres room for all of us and if there is ever a conflict, I'll happily back off and let him have first dibs.

As far as the insurance Patrick, i would call your agent and get quotes on multiple homes. They should quote out your houses in a timely manner. Make sure you are carrying lots of liability insurance protection. Ask for the maximum or consider carrying an umbrella policy. They are very cheap. Good luck.

Back to some numbers, i took my expenses, taxes, mortgage payment, insurance, subtracted from rent, then divide by cost of house and repairs, correct??? but the number was like .023

these are some hypotheticals but close to what i expect

rent 600: mortgage 350: taxes 45: ins 65: cost of house and repairs 50000

600-460=140 *12= 1680 / 50000=.0336

what seems to be wrong or am I just not getting it or WHAT ????????

I'm trying to figure out if I'm getting a good deal on this house at 47500 with just not even really 2500 in paint and cleaning maybe carpet but not much anything else. I am looking at giving 3000-4000 down and the owner carry the note. at like 10 %, that is another thing I really don't understand what the payment really would be ? i'v already looked up taxes and it is a guess on the ins. but I think that should be fairly close.

could some one help, I was just called on this today and looked at the house and really is not bad shape
Please anyone in the Dg family

As far as I have read your mortgage payment is not an operating expense.

So what I came out with is your CAP rate would be .11 with the numbers you posted...

Is your NOI based on annual or are you doing the monthly X .65 then dividing by the purchase price? thanks.