Have you thought about becoming a real estate investor?
Are you looking to make supplemental income in addition to your regular salary? Maybe you are interested in one of our properties and don’t know where to start? Lucky for you (and us!) we have years of experience with investors flipping and renting out homes. Since renting out homes is the more popular option, we’ll go over how to calculate your potential monthly profit to see if real estate investing would be good for you!
How to determine your monthly profit for an investment rental property:
Step 1: Determine Monthly Income (Gross Income):
This will be rent current tenants are paying for or the asking rent
Step 2: Calculate the Monthly Expenses
Your monthly expenses can include:
- Property taxes
- Insurance – Get a quote from an insurance provider
- Property Management fee– 10% of monthly rent + 1/2 of first month’s rent
- Mortgage – Use an online mortgage calculator to determine the monthly payment.
- HOA – Annual fee/12 (Do not forget this step because an HOA can hurt cash flow!)
- Vacancy – 10% of the monthly rent towards vacancy expenses
- Repairs – The amount for repairs will determine on property condition. If a house is a turnkey property, use 5% of rent. If property needs work, use 25% of monthly rent. Do not overestimate the quality of your property and estimate too low.
Step 3: Net income = Monthly Income – Monthly Expenses
- Your net income is your monthly cash flow. If positive, buy. If negative, don’t buy!
Step 4: Calculate Returns
- Cap Rate
- Net Annual Income / Purchase Price
- This gives you an idea if you are buying the property at a good deal. It basically compares the ROI to the purchase price.
- This does not include the mortgage payment.
- Cash-on-Cash Return
- Net Annual Income / Total Cash Invested = Cash-on-Cash Return
- This is how much return you are getting on the money you invest.
- This does include the mortgage payment.
- If you pay all cash for a property, this number will be the same as the Cap Rate.
- The difference between the two returns: Cap Rate measures how good of a deal you are getting on purchase price and the Cash-on-Cash measures the exact return on your money you are getting.