Because we focus on buy & hold rental properties, Cash Flow is THE MOST IMPORTANT metric we look at when considering an acquisition.
Caution: This post goes technical real quick and my geeky side does come out 🙂
Most people, even some experienced Realtors, think cash flow is the gross revenue (total rents) generated from a rental property. Unfortunately, that is not true. Cash Flow is similar to Net Operating Income, but also includes some calculations for future expenses. Let me explain…
Cash Flow, as I calculate it because it seems almost everyone has their own way of calculating this, but Cash Flow equals the Monthly Revenue minus TRIMMVC.
Monthly Revenue – TRIMMVC = Cash Flow
What is TRIMMVC? Glad you asked.
Taxes: usually a known quantity by visiting your county’s Property Appraisers site.
Repairs: I typically estimate these between 5-10%. The range is based on the amount of repair work done prior to placing a tenant. The work performed up front, the lower the percentage and vice versa.
Insurance: Insurance carriers always vary, so I encourage you to shop around. While underwriting a potential acquisition I stay conservative an estimate $100-125/unit.
Mortgage: this is an obvious one but unless you’re paying all cash for a property, this should be your largest monthly expense by far.
Management: as in Property Management fees (typically 10% on a SFR long-term rental) and any utilities you’ll include as part of the monthly rent (water/sewer, electricity, gas, snow removal, lawn care, garbage, HOA fees, etc). Also, include utilities and lawn care as little as possible in your leases.
Vacancy: Also estimated between 5-10% based on the property, current tenant situation, and neighborhood.
Capital Expenses: I typically estimate these between 5-10% also. The range is based on the amount of repair work done prior to placing a tenant in the property and covers such things as a new roof, bath room remodel, appliances, etc. And just like Repairs, the more work performed up front, the lower the percentage I use in my underwriting and vice versa.
Here is a real life example of how I evaluated a Pensacola property for acquisition. This property is fairly old and needs some repairs so I’ll be using 10% for Repairs & Maintenance as well as 10% for Capital Expenses. This property should stay rented fairly easy so I’ll use 7% for vacancy. I’ll also be using 10% for Property Management Fees, the tenant is responsible for all utilities and there are no HOA and I’m purchasing this Pensacola property with 20% down on a 30 year mortgage.
Let’s do some math!
Monthly Rent: $1,300
Taxes: $840/yr or $70/month
Repairs: 10% of $1,300 = $130/month
Mortgage: $500/month (taxes and insurance are not escrowed)
Management: 10% of $1,300 = $130/month (for Property Management, all utilities are paid by the tenant)
Vacancy: 7% of $1,300 = $91/month
Capital: 10% of $1,300 = $130/month
Add up all of our estimated expenses:
$70 (T) + $130 (R) + $125 (I) + $500 (M) + $130 (M) + $91 (V) + $130 (C) = $1,176
Based on these calculations, this meets one of our investing strategy criteria. Now to further evaluate this property with our other criteria before making an offer.
To make calculating cash flow quick and easy, I use DealCheck.io .
“The easiest and most affordable calculator on the planet!” But don’t take my word for it. You can try it for free.
Actually, it’s free to use and you only pay for the parts that you need. Sign up today, for FREE, and when you’re ready to purchase, use Promo Code W2 CAP to receive 25% off your subscription. Not ready to sign up for free yet? Demo videos and more resources available at w2capitalist.com/dealcheck.
“Seriously guys, this app is AMAZE-BALLS!” Accurate property analysis in just a few clicks.