To help you as you begin to look at real estate investment possibilities to build your income, we created a Cash Flow and Return on Investment Calculator that uses the national averages for all the costs and quickly shows your monthly and yearly cash flow and return on investments. This a short cut to save you time. (You can find the calculator here on the website.)
Since these are national averages, they will be different than a specific piece of property you may be researching. Some costs like property tax vary greatly from one location or state to another. This tool is only to help your determine where to best invest your time by narrowing down your property choices.
In this calculator, the costs are already embedded in spreadsheet. It reveals your
- Down Payment. The usual rule is 20%, but if you qualify and can use some of government programs you may be able to reduce this. It could be higher if you’re buying a larger commercial property. If you have a good banking relationship, your banker can also help. In the Quick and Easy Calculator, we’ve assumed a 20% down payment.
- Closing Costs. Closing costs need to be added to the purchase price to get a good estimate of the amount you will financing and the amount of your monthly mortgage payment. Closing costs can range between 2% and 5%. In the Quick and Easy Calculator, we use the mid-point, 3.5%, as our assumption. After you decide which properties to research in more detail, you then get a good estimate of fix-up costs. You may want to include those costs in your loan.
- Utilities, Insurance, and Maintenance. In the Quick and Easy Calculator, we use the following national averages:
- Utilities: 1%
- Insurance: 1%
- Maintenance: 2%
- Property Tax. This can be a difference maker. There are significant variations from state to state and city to city. There are seven states that have no state income tax and they often make up for it with higher property taxes. Do your research and get the property tax history. See what the increases have been for the last few years and whether or not you should allow for a higher amount soon. The national average is 1.04%. In the Quick and Easy Calculator, we assume 1%.
- Estimated Vacancy Rate. You may want to use the average but there are some locations, such as vacation areas and college towns, where it could be higher. The national average between 1956 and 2016 was 7.37%. It fluctuates with the state of the economy and housing conditions. In the Quick and Easy Calculator, we assume 7.5%.
- Management Fee. If you’re going to manage the property yourself you won’t have this expense. Some companies charge a flat rate but most charge between 8% and 10% of the monthly rental income. Check with a local property management company to get a good estimate. In the Quick and Easy Calculator, we assume 9% as an average.
The Detailed Calculator
You will be spending some time with the worksheet. It requires you to do the necessary research to get some realistic numbers for this specific property. You will need to research each of the costs found in the Quick and Easy Calculator, then replace the assumed numbers with your real numbers on the property in the Nitty-Gritty Calculator. The Nitty-Gritty Calculator is the same format as the Quick and Easy, but you have to fill all the numbers.
Using the worksheet, do your research and plug in the numbers to find out if the property will provide cash flow. These are costs that can vary greatly and make the difference in whether you make an offer or not.
If this worksheet looks promising, you can proceed to make an offer—as long as your contract gives you a way out if the next filter, a physical inspection, reveals things you didn’t know about the house.
Now you have a realistic estimate of the amount of annual cash flow that you can expect from this property. You can determine whether or not you should make an offer or not. For the drive toward your 5 Day Weekend, high cash flow is what you need.
Profitability is important. A good index to use is the return on investment (ROI). By doing the analysis for a piece of property, you can determine if the ROI meets the minimum standard of a good real estate investment. A good minimum standard for the return you should look for is 10%.
If you looking at two or several pieces of property, the results of your worksheet can help you determine the best piece to buy. And, it can help you compare the property’s ROI with other non-real estate investments.
In my next post, I look at the third filter you should consider when acquiring real estate as a investment: property inspection.
In the meantime, I’d love to hear your thoughts on real estate, and how you assess whether something is worth your investing in it. Thank you for sharing!
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