Calculating a rental property's cash flow is a relatively simple process:
Using the 1% Rule to Calculate Gross Cash Flow
According to the Rule, the gross monthly rent from a home should be at least 1% of the purchase price: Property price = $100,000 x 1% = $1,000 per month gross rent.
7 Hot Tips For Purchasing Your First Positive Cash Flow Property
Try one of these five strategies to free up cash and stay afloat.
For example, if the properties in your market will cost $100,000 and if you plan to own them free and clear, you'll need 10 rental properties. But if you plan to have 50% leverage and the properties cost $100,000, you'll need to own 20 rentals.
How to Find Positive Cash Flow Rental Properties to Invest in
Calculating Property Cash Flow
Property cash flow is calculated by adding all sources of potential income together, then subtracting all the expenses out. The bottom line number is your net cash flow that the property generates.
The most obvious way to increase cash flow is to increase the rent amount on your property. This can be done by acquiring an under-performing property (where current rents are lower than market demand) and aligning the lease to market rent.
You need to charge high enough rent to cover your expenses and take home a profit. With mortgage payments to contend with and a tough competition, you may only be able to profit $200 to $400 per month on a property. That's $4,800 a year, a far cry from the $50,000 we're talking about for earning a living.
Generally, the average rate of return on investment is anything above 15%. When calculating the rate of return on a rental property using the cap rate calculation, many real estate experts agree that a good ROI is usually around 10%, and a great one is 12% or more.
Yes, owning rental property is worth the headache and hassle if you want to build long-term wealth. I've owned rental properties since 2005, and they have accounted for millions of dollars in wealth creation. Building wealth through capital appreciation and rent appreciation is a powerful combination.
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