Hello good day to all that pursue wealth, I have some questions question concerning gross income and rental properties. I have read that if you can obtain a property with a low down payment (10-12 percent) and keep the monthly payments less than half of the gross income, these two factors will result immediately in a positive cash flow for the investor/landlord.
Can any investors/landlords provide me with feedback to validate the previously mentioned statements?
I have been trying to perform some math to calculate how this can occur, my calculatons appear to be incorrect. Can anyone provide a hypothetical scenario involving numbers that prove that the above percentages will result in a positive cash flow?
Are the monthly payments limited to the mortgage, or does the monthly payments include utilities and mortgage [total debts related to the property for that month]?
Thanks again for reviewing this email and providing feedback.
what you describe are just “rules of thumb” that may or may not give you a good estimate. You need to be precise and develop a spreadsheet with entries for all the expenses (taxes, insurance, mgmt fees, utilities, yard care, repairs, maintenance, advertising) and allow you to subtract from a the gross income, figure in vacancy. Rental properties come in all shapes, size and conditons so you really need to evaluate the cost for that particular property. As an example, I own properties that have propane tanks (rented from the utility, I pay) but no sewage bill as it septic; others have gas from a utility (tenant pays), but its on public sewer/water. Some of my properties have flood insurance ($500/yr); other one don’t.
So IMHO its important to be as accurate as possible becuase if your off by 20% on your expenses you might be cash negative. I would estimate that 80% of the rentals I look at, the buy/no-buy decision is decided by a small margin. Sure there are some deals that come along that are no-brainers, but those don’t fall out of the sky every day.
As mentioned these are really just guides to weed out properties when you are looking at many. Two multi family properties may cost the same but if one is heated by the owner that could throw that theory out the window.
Another theory is if monthly rents are 1 - 1.3 % of the selling price it may support a low money down financing structure. So if I see a property where the rents are lesser % it just goes to the bottom of the list.
These ‘guides’ help you cull through lots of properties faster and should not be a hard and fast rule for a purchase decision.
A detailed, accurate cash flow should be determined for that.