How do you to figure cash flow profit from a rental property?

Question

I have an investor sending me properties everyday in my inbox. They are rentals with property manager and tenants already in place paying rent. One of the houses is selling for $25,000 that is rented at $650 per month. The investor said the only expense the buyer of this house pays is the closing costs. The property manager charges 10% of rental income. I am looking for a private lender. The renter pays taxes and utilities. I assume I take out whatever interest rate the private lender will charge from the rental income. Any other costs I need to be aware of?

Account Closed · Answer

You need to subtract the mortgage, taxes, insurance, management, repairs, vacancy, utilities, etc.

The monthly rent minus all of these expenses is your cash flow. Check out the BP rental calculator so you don't forget anything.

JD Martin · Answer

Never heard of renters paying property taxes directly. Vacancy and repairs are only theoretical costs until they are realized but need to be factored in anyway - i.e., if the place never goes vacant there's no cost to you. This is rare, so most people will use some reasonable number to account for occasional loss of rent (5%-8-10% is pretty common). Repairs are a wild card and you will have to have some knowledge of what you are buying to get a rough idea. A fully rehabbed property will need less repairs than one last fixed 30 years ago. A new house will need less repairs than an old house.

Based on your questions, I think you are probably not ready to jump into the mix. You may try doing some more reading on here or checking out one of the webinars to learn a little more about owning rental property; figuring out your cost basis is pretty basic stuff, and you want to have that down pretty solid before you start spending money.

Tony Marcelle · Answer

I was told the renter pays taxes and utilities. As for the repairs and vacancy, is that covered by me the buyer or property management?

Irina Belkofer · Answer

Never buy anything until you understand what are you doing 100%.

1. $25K house mostlikely needs repairs - big time. It's on you.

2. PM charge money to collect rent from the Tenant and deposit 90% - expenses in your account. PM doesn't do repairs - he hires people which cost you.

3. Taxes are on the property, if Tenant doesn't pay them - you'll be foreclosured

4. Water/sewer is also on the property. If you state lets move it to the Tenant - it might be ok but in the end of the day, they have right to slam the lien on your property.

5. D class neiborhood is very hands full management, and your PM doesn't risk if you have to evict the tenant: you pay lawyers, movers and whatever else it might be to get rid of such Tenant. Then you pay for clean up, repairs to get ready to find another tenant.

When everything is done, repeat all over.

Ps

- roof life 10-25 years depends on the weather, woods around and materials

- furnace 25-30 years

- HWT 10 years

Etc

Now factor these money into the price of the house and get it inspected how old is the major parts. With deferred maintenance (everything is old) you might need another $12-15K NOW.

Think about all that and then consider it again

Ali Boone · Answer

Ummm...yes. Insurance, repairs, vacancies...no idea why a tenant would pay property tax, so property tax...

Try these equations:

https://www.biggerpockets.com/renewsblog/2013/01/1...

Also, I recommend understanding the nuances of having such a cheap property with tenants who pay so little in rent. You are likely to end up with a bit of turmoil with that cheap of a property (probably not in great shape and/or in a bad neighborhood) and lower-quality tenants (evictions, excess repairs, etc.).

Tony Marcelle · Answer

I did a Google search of the property which does look to be in a class d neighborhood.

Jason G. · Answer

The renter should be paying the rent and possibly utilities depending on the lease agreement with you responsible for PITI.  To determine cash flow you would need to take the rent and deduct from that the PM fee and PITI as well as money you set aside fro maintenance, CapEx, and vacancy.  Then you have your cashflow.  $25,000 @ $650 rent per month seems sketchy.  Are these properties in Class D neighborhoods?  With respect to repairs and vacancy, you are responsible for the costs of repairs.  Your PM may handle doing the repairs and placing tenants, but that depends on your property management agreement and you pay for the costs associated with that.

How do you to figure cash flow profit from a rental property?

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