You will find this calculator easy and fun. It’s a fast way to check out the projected monthly and yearly cash flow and your return on investment before you commit your hard-earned dollars.
There are two ways to use the calculator. You can do a quick run-through with your best estimates for the amount financed, closing costs, mortgage interest rate, and costs such as insurance, utilities, property tax, etc.
If the cash flow and return on investment look good with your estimates, you can do research to get more precise numbers. Then you can go back for a second, more accurate round.
Many buyers don’t do their homework. After they buy a property they are surprised when they learn that they have left out or underestimated some costs.
They discover their cash flow and return on investment (ROI) aren’t what they expected and that their investment wasn’t the best.
When you get your report after working through the calculator there are three benchmarks to consider.
A couple of quick definitions: Cash flow is the net amount from your rental income. It’s the amount left after deducting your mortgage payment (principal and interest) and all expenses.
We created the calculator to focus on cash flow because that’s what 5 Day Weekend is all about — creating enough passive income to give you more freedom — more and better choices about how you want to live your life. Your Return on Invested Capital is important because the higher the yield, the more money you have to build your real estate holdings.
ROI is the percentage return on the money you invested — the assets or hard cash you’re putting to work. If you bought a $1,000 CD with an interest rate of 2.0%, in a year you would earn $20 with an annual ROI of 2%. If you bought a stock for $10,000 and sold it after a year for $10,789 ($10,797 less $8 brokerage fees), you would earn $789 or 7.9% annual ROI.
If you bought a duplex for $300,000 and put $60,000 plus $8,000 closing cost down, the $68,000 is the amount you put to work. Dividing that number by the amount of net rental income you have left over at the end of the year (after all expenses) is your ROI. Our calculator crunches all the numbers, so you can easily see your yield.
Your ROI will vary, depending on several variables such as location and the economic cycle. As a rule, you should always look for an 10% or higher annual ROI, and with patience and good research you can get 15% or more.
The calculator includes places for you to fill in all the usual costs. But if there are additional recurring costs for this specific property, include them in the “Other Costs” box in the Estimated Yearly Costs section. It’s important to include all your costs. Eliminate surprises!
Over the years you will have some vacancies, so you should account for them. For the last 50-plus years (1956–2017) the U.S. national vacancy average has been 7.37%. If you have information that indicates a higher vacancy rate for this area or property, include that in your evaluation. In the calculator, 7.5% is the estimate for an allowance for vacancies.
If you want to minimize the time you spend on your properties, or if you’re purchasing an out-of-town property, you will want to hire a property management company. The cost and method of payment can vary from city to city.
Some companies charge a percentage of the rental income. Others charge a flat fee. The average is usually between 4% and 12%. Residential property fees are typically higher than commercial.
When making a first run-through on the calculator with your estimated costs, 7.5% is a good average percentage to use. If the initial cash flow and ROI look good, you can obtain the cost from local property management companies and then add in the actual cost for your final calculation.
As you know from reading the book, there are several other benefits from investing in real estate, such as tax advantages and building equity so you can leverage your real estate assets to buy more property. If your cash flow and ROI are strong enough to make a purchase, these additional benefits are big bonuses. As you learn more about real estate investing you will appreciate these advantages.
Fill in the boxes with the information you have about a property you’re evaluating.
As you add more information, the calculator will begin to show you the numbers. When you finish, it will give you the monthly and yearly net cash flow amount and return on investment percentage.
It will also show you the difference between managing it yourself or hiring a property management company. And, it will show you the number of months it will take you to reach cash flow breakeven for additional fix-up costs.