When something is important, I like to repeat it. So here goes, cash flow is king. And because cash flow is king, many like to hype up their properties as excellent cash flow producers to attract interest. However, as with anything else, buyers should beware of the hype.
I have seen many people here on the BP forums, at my local reia club, on the MLS, on Craigslist and anywhere else properties are advertised hype their properties as generating excellent positive cash flow. Here is an example of what might be said:
123 Main Street – Red Hot Cash Flow!
| Monthly Cash Flow | |
|---|---|
| Rental Income | $1,000 |
| Principal and Interest | $350 |
| Insurance | $50 |
| Taxes | $150 |
| Total Cash Flow | $500 per Month |
At first glance, this appears to be an awesome property. $500 positive cash flow per month! Who can pass on that? But those of us with more experience know there are a few pieces of this puzzle that are missing. Here is what those pieces are.
Vacancy Factor
The property is not going to stay rented 100% of the time. There will be some periods of time where you are in between tenants and there will be some costs associated with moving tenants in and out. You should budget for at least 10% of your gross rents going towards a vacancy factor. Thus, in the above example, if rental income is $1,000 per month, add another $100 to the expense side of the equation.
Repair Expenses
Things break. You as the landlord are going to have to fix it. You can expect to pay about 10% of your gross rents in repair expenses. So again, like in the example above, add another $100 to the expense side of the equation. …read more