Real estate investing means you must look at the numbers. Would you love to invest in real estate but that don’t quite understand the numbers enough to make an informed decision? I am often asked, “How do you determine if a deal is a good real estate investment? Well, I use a simple formula when I evaluate a property in a real estate investing deal is to determine if it’s a good candidate for a rental with positive cash flow. This formula also allows me to determine if I need to use a different strategy to make a real estate investing deal profitable.
Take this house below as an example.
The purchase price of the property in this real estate investing deal was $80,000, and it rents for $900 per month. Therefore $900 monthly rent x 12months = $10,800 per year. The expenses would include 10% property management fee ($1,080 per year), annual taxes of $1,000(per year) and annual insurance of about $600 (per year). This equates to $10,800 rent per year – $2,680 yearly expenses (PM, Taxes, Insurance) = $8,120 per year.
In addition to the above expenses, I would also add another 10% for unexpected maintenance and vacancies. Therefore, $8,120 – $812 (10%) = net $7,380 yearly positive net cash flow from this real estate investing deal.
Once you have the net cash flow figure, this figure is then divided by the purchase price of $80,000 and then you will get a sum of 0.0913 which would mean a cash on cash return of 9.13% from this real estate investing deal.
As you can see, this is a pretty good return on investment from this real estate investing deal. These numbers are based on a cash purchase but could even look better if you used leverage or financed using the bank’s money.