| Cash flow is the money flowing in and out of | | | | the formula. You do this by: |
| operating your rental property. Many investors live | | | | Increasing Rental Income |
| by the positive cash flow generated from the | | | | You can offer a lease to own option to collect |
| rentals. You can use the following very simple | | | | additional income with this option premium. Lease |
| formula to calculate cash flow. Even before buying | | | | to own tenants tend to be longer term tenants |
| a property, you can estimate the cash flow to | | | | and more financially sound. |
| determine if the property is a good investment. In | | | | Decreasing Operating Expenses |
| another article, we also discuss a modified formula | | | | Shop around for cheaper hazard insurance. |
| that factors in tax deduction, which gives you a | | | | Shopping online is the best way. Let those agents |
| true cash flow because of the tax savings | | | | come to you with competitive offers. If you have |
| allowed by the IRS. | | | | multiple properties or an automobile policy with |
| Cash flow formula: | | | | the same insurance company, you are able to get |
| Rental Income - Operating Expenses - Debt | | | | substantial discounts. |
| Payments | | | | Reducing your property tax liability is another way |
| The cash flow formula can be used for monthly | | | | to reduce operating expenses. Many counties |
| or annual cash flow depending on the numbers | | | | have temporarily reduced property tax amounts |
| provided. Let's calculate an annual cash flow | | | | due to decreasing property values. You should |
| example for a $150,000 single family house with | | | | also request to further reduce the tax amount if |
| 20% down payment ($30,000). | | | | you think the assessed value is not properly |
| Rental income is the rent received annually. For | | | | adjusted. |
| $1,000 monthly rent, that is $12,000 annual rental | | | | It is often worth it to request a reassessment, |
| income. You can reasonably factor in the vacancy | | | | because the process is usually very |
| rate depending on the rental market. Let's | | | | straightforward without taking much time and |
| assume 7% vacancy rate, this yields $11,160 | | | | effort. Collect a few transactions in your |
| ($12,000 x 93%) annual income. | | | | neighborhood to back up your number. These |
| Operating expenses are the necessary expenses | | | | transactions need to be around the time when |
| paid in order to operate the property. Such | | | | the property is assessed by the county for a |
| expenses include property tax, insurance, and | | | | given tax year. You can get those numbers from |
| repairs. A reasonable figure for this property is | | | | your realtor or |
| $3,000. | | | | Having a good handyman and good tenants are |
| Dept payments are the mortgage payment if the | | | | equally important as they both will save you a lot |
| property is purchased by borrowing money. For a | | | | of money on repair expenses. Consider purchasing |
| cash buyer, this element is completely eliminated | | | | a home warranty for piece of mind. It is like an |
| from the formula. With a 30 year 5.5% loan of | | | | insurance that protects you from huge expenses |
| $120,000, your annual mortgage payment is | | | | in the case of a large repair or issue. |
| $8,176. | | | | Decrease Payments |
| With these figures, the cash flow is $11,160 - | | | | You can either put more of a down payment on |
| $3,000 - $8,176 = -$16. As you can see, this | | | | the property, increase the term of the mortgage, |
| property almost breaks even. To have a positive | | | | or reduce the mortgage rate. |
| cash flow, you can work on the three elements in | | | | |