Are you considering purchasing an investment property? Before you take the plunge, it’s important to always determine the cash flow of an investment property. Cash flow is the money left over after all expenses are paid from rental income. It’s important to know the cash flow of a potential investment property so you can ensure that it will be profitable.
To calculate the cash flow of an investment property, you must first determine your total rental income. This includes all rents collected from tenants over a period of time, including security deposits. Then, subtract your total expenses. These include mortgage payments, taxes, insurance, maintenance fees and any other fees associated with renting out a property. If there is anything left over after deducting all expenses from rental income, then this is your cash flow.
For example, let’s say you purchase an investment property for $200k and secure a mortgage for 80% of this amount ($160k). Your mortgage payments are $1,200 per month and your rental income is expected to be $1,500 per month after taxes and insurance costs are taken out. In this case, your monthly cash flow would be $300 ($1,500 in rental income minus $1,200 in mortgage payments).
It’s also important to factor in other costs associated with owning an investment property such as legal fees and closing costs. These can significantly cut into your profits and should be taken into account when calculating cash flow. Furthermore, if you plan on hiring a management company or using a real estate agent to handle tenant queries or maintenance requests then these costs should also be considered when calculating cash flow.
When determining the cash flow of an investment property it’s also important to factor in the possibility of vacancies and repairs that may occur down the line which can further reduce profits. To mitigate this risk it’s advisable to set aside some money each month to cover potential repairs or vacancies so that these unexpected costs don’t eat into profits too much.
In addition to understanding cash flows when it comes to purchasing an investment property it’s also vital for homeowners to understand their own finances too. Making sure you have enough saved up for a down payment on an investment property as well as having enough saved up for potential repairs or vacancies is key before taking on this type of financial commitment.. It’s also helpful if homeowners understand their credit score so they can secure the best possible mortgage rate – which ultimately affects their overall financial savings in the long run too!
All in all understanding how to calculate an investment properties cash flow is essential before getting started on this journey! Being aware of all associated expenses as well as having enough saved up both financially and mentally will help ensure that investing in a new home is not only smart but successful too!