It’s inevitable.

You’ll be belly up to a full serving of spaghetti and tofu meatballs with a potential client and they’ll utter these words: “One day, I want to buy an investment property.” And you’ll shake your head yes as you slurp because of course you know the concept of it. But do you really know how to decide which property to find them? 

The first of many steps is – does the property cashflow? 

Here’s a cheat sheet on how to determine that quickly for one of your clients.

1. Work out all the estimated monthly expenses. Remember, when working cashflow, we are simply looking for it to break even or better every month. Mortgage, interest, taxes, insurance, property management, landscaping, cleaning, etc. must all be added up. There are online calculators to help you with this. Remember, you’re just looking for an estimate.

2. Work out the potential income. What rents could you get? Is there a garage that could be rented separately? Is it a multi-unit? Essentially identify any income related to the property.

3. Next, decide on a vacancy rate. A vacancy rate is the percentage of time the property could potentially be vacant and earning no income. Depending on your area, it could be as much as 30%. Subtract 30% (or whatever vacancy rate you choose) from the potential income. Last time I checked (online) in my area, it was under 5%.

4. Now, take the total income, less the vacancy rate, and subtract the total expenses. You now have the monthly cash flow.

5. Remember, this is not the net amount. The investor will pay income tax on any positive cashflow the property has. Have them seek a CPA for guidance on how to best manage that.* Every individual situation will be different. 

The best advice I can give you is to start your research on this topic early. Remember, you are the source of information on all things real estate. Calculating cash flow is the first step of many in advising your clients on how best to grow an investment property portfolio.

Let me know if this post leaves you with a ton of questions. Over the next few weeks, we will deep dive into more aspects of investment property purchases and how you better help your clients. 

Leave your questions below and we can unearth this mystery together.  

Until then, chin up, keep your feet moving … and burn the white flag.

sz

*Any tax questions should be directed to a CPA.

Copyright 2019 - Shelley Zavitz Realty