Cash Flow Is The Key To Real Estate Success...with example
In order for real estate to support you and create wealth during your lifetime, you have to focuson cash flow. For serious real estate investors, investing in income-producing properties is an excellent opportunity to build financial protection that can last a lifetime. It is a very simple strategy. With cash flow you survive and grow-----without it, you have constant worry about finances!
Cash flow is simply: INCOME less EXPENSES
Sample Cash Flow Calculation
Here is an example of a Triplex in Windsor with an asking price of $279,000. The units rent for $1,000 (Unit 1), $800 (Unit 2) and $600 (Unit 3) and the tenants pay all utilities. Taxes are $3,200/yr and insurance is $800/yr.
Lets say we ended up agreeing on a price of $265,000. We put the minimum down payment required for an income property (20% = $53,000 in our case) leaving us with a mortgage of $212,000. This boils down to mortgage payments of around $1,200 per month. Your mortgage payment will vary depending on the type of mortgage you choose. In this case, we went with accelerated bi-weekly payments on a 5 year fixed mortgage at 4% amortized over 25 years. You can use the TWF Calculator to play with mortgage payments.
So, we now know our income and expenses: Income Rent: $2,400/mnth ($28,800/yr). Factoring in our vacancy allowance of 6% gives us an adjusted income of $2,256 ($27,072/yr)
Expenses Mortgage: $1200 ($14,400/yr) Taxes: $267 ($3200/yr) Insurance: $50 ($600/yr) Maintenance: $220 ($2650/yr) Total: $1737 ($20,850/yr). This gives you a favourable cash flow of +$519/month ($6,222/yr). From cash flow alone this means an annual return on investment of 11.7%.
If a property does not have at least a neutral cash flow you should stay away. A property with negative cash flow means that you’ll be putting your own money into the property. Every month. For as long as you own it. This kills your personal cash flow, causes unnecessary stress, and will likely drive you away from income properties leaving a bitter taste in your mouth.