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Follow these steps to determine your monthly income to see if property management would be a good investment for you!
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
- 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 anonline mortgage calculator to determine 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 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 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.
Using these simple steps, you are one step closer to becoming a property investor.