To make wise investments in real estate, you should master estimating cash flows. The cash flow or net income determines how much you will make from a particular property every year. Follow the steps given below and determine the cash flow for your next investment property.
Know Your Mortgage Payment
Monthly mortgage payments play a key role in determining the cash flow of an investment property. If you want to make money with investment property, carefully determine the mortgage payments. The four factors that determine your monthly mortgage payments include the price of the real estate, down payment (made as a percentage of purchase price), interest rate and term of loan. While the purchase price is not determined solely by you, carefully determine the other three factors to ensure your mortgage payments are not very high.
Determine the expenses you will incur as the owner of the property
After determining the mortgage payments, also estimate other expenditures that you will face as a property owner. This includes annual taxes, maintenance costs, insurance costs and several service charges. If you want to make money from the investment property you are planning to buy, it is very important to estimate these costs accurately – do not guess the numbers.
Determine how much rent you can earn from each unit. To determine the rental income, compare your property with comparable investment buildings in the area and find out how much individuals and companies are paying as rent. Once you have reached a solid estimate, it’s better to subtract 5 to 10 percent from it. For example, if the estimated rental income is 10,000 dollars, then subtract 10% ($1000) from it and use $9000 to estimate cash flow. The estimated rental rates are discounted to avoid any unforeseen slumps in the market.
Determine Cash Flow Of Investment Property
Multiply your monthly rental income with 12 to find the rental income for the entire year. Subtract the expenses as well as mortgage payments from the annual rental income and the resulting amount will be how much you will earn or lose for the entire year. If the resulting figure is a positive number then it will show a gain, whereas a negative sign will show a loss.
Determine your net income or cash flow
To determine your net income from the investment property, subtract the tax rate prevailing in your area from the cash flow determined above.
Is the net income good?
The simple tip to be sure that the estimated cash flow is good for you is that your net income should be at least 8 to 10 percent of the down payment. For example, if you have made a down payment of $10,000 and the estimated cash flow is $1000, then the percentage returns should equal 10 percent, ($10,000/$1000*100).