Figuring out ROI

[Account Closed]

Can anyone give me advice on how to figure out cashflow for rental properties.

A lot of detail but simplicity would be best, Im gearing up to purchase my first multi-family home.

I am already approved for the loan and have been house hunting for quiet some time now.

So I would really appreciate the help, thanks!

[Curt Davis]

You take either your gross cash flow or figure out your net cash flow, multiply that by 12 (12 months) and then divide that by your all in expense. 

Example:  Rent is $800 minus mortgage payment including taxes and insurance $400 then minus out monthly property management expenses of say $80 to have $320 in gross monthly cash flow left over. $320 x 12 = $3,840. 

If you purchased the home for $70,000 and put down 20% $14,000 but you also had a total of $4,000 in all in closing cost including tax and insurance escrow your total investment was $18,000. 

$3,840 / $18,000 = 21% gross ROI

Now to get your NET cash flow you would also subtract additional factors out like say $50 repair allowance and $50 vacancy allowance per month. Maybe even $50 for CAPEX. So you take the $320 gross minus $150 to get $170 per month in NET cash flow.

$170 x 12 months = $2,040 / $18,000 = 11% NET ROI

If I botched all this math forgive me. 

Hopefully this gives you an idea of how investors figure if its a deal or not. Some might think this example is a good deal and some might not. 

Good luck

[Account Closed]

@Curt Davis Thank you very much! I appreciate the help from you and the other members! Im so glad i signed up with bigger pockets lol. But once again thank you and God bless. 

[Tracy Sharpe]

Thanks Curt for your ROI explanation. I have read many definitions but yours divides it up into a simple and meaningful definition using an easy to understand example; Gross and NET ROI.

[Rick S.]

@Account Closed here is another article on BP with similar information that Curt provided:

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

[Account Closed]

@Rick S. hey rick! Thanks that was very informative as well!

[Cuneyt Unar]

Hi Jorge,

I am a newbie here as well but I was digging into the same Q for weeks now and here is what I came up with: 

My formula is conservative and I always tend to cut 35% of the gross rental income for any property that I am looking into in and here is the breakdown:

Gross Yearly Rent - 35% to account for the following:

10% Property Management*. Even if you do this yourself, your time should be compensated.

10% Vacancy Factor. Over time, you will have vacancy, plan for it.

10% Capital Reserve Fund. The useful life of capital improvements will come to and end, budget for it!

5% Repair Reserve. Things that you cannot bill back when they wear out. Faucets, locks, electrical fixtures.

Gross Yearly Rent - 35% = Net Operating Income (NOI)

NOI - Operational Expenses* = Cash Flow

Cash Flow / (Acquisition cost + any make rent ready expenses) = Cash on cash ROI.

This is a conservative approach and more than 90% of the rental properties advertised out there will not hit these numbers but if you want to make it right, you have to be conservative. Special thanks to @markupdegraff for helping me out in constructing this formula.