ScaredyCatGuide to Real Estate - Buying Right For Cash Flow (Revisited)

Like many thing in life, you make your money when you buy! Whether buying a home, stock or rental property they will all give you a better return if you buy at a good price.

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When it comes to Rental Property Investing, it's what I like to call....

Buying Right

When it comes to Rental Property Investing- Why do we want to buy right?

Because it gives us confidence we are making a sound decision, thus drowning out that scaredy cat habit of failing to pull the trigger.

Steps to Buying Right

1st – You run the Financials

The first thing I do when I see a property for sale is run the numbers. If the property is not going to cash flow when I take all the anticipated expenses and subtract them from the going rental rate then I move on. No point in viewing the property.

Luckily, we can use a simple property calculator to find this result.

(Success Note: You should have a property calculator that analyzes the financials of every deal you consider – you can download the scaredycatguide calculator directly from the website)

In the end here is your formula you should understand.

(Taxes + Insurance + Vacancy + Maintenance + Reserves) = Operating Expenses

Operating Expenses equal your total cost per year to hold that property.

(Note: there can be additional expenses, such as management if you hire a property mgr. or an HOA fee if there is a homeowners association.)

There is a general rule of thumb that Operating Expenses will cost 50% of your total rental income. It’s good for a quick calculation. However, I have found it more in the 40-45% range for all the properties I’ve analyzed.

Once we know are Operating expenses we can find our Net Operating Income (NOI)

Total Rent – Operating Expenses = Net Operating Income.

Now we can see how much cash flow the rental property is creating each year.

Net Operating Income – Debt Service = Cash Flow

(Debt service assumes you took a mortgage to buy the property, if not than your NOI is your cash flow)

Now for the most Important Number:

The Cash on Cash Return

Cash on cash return is the main number I use to decide whether a property is worth pursuing.

This will tell me what return I am getting on my money. I generally look for at least 8%, because otherwise I mind as well put my money in the stock market given the long term historical returns there are 8%. However, with real estate I have a HARD ASSET that someone else is paying down the mortgage on!

Cash on Cash Return = Cash Flow/Total Investment

That’s the key number. I want to see 8% or better, that is my preference. I know investors that won’t accept less than 10%

You can see a working example of running these numbers through a property calculator on the full post here: http://scaredycatguide.com/buying-right-to-ensure-cash-flow-revisited/

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Best Regards,