Hey guys, Cody Sperber the Clever Investor here and today we’re covering a very important topic in real estate investing and that’s How to Calculate Rental Property Returns! Download my free training & take my 30 day challenge!!
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Now I want to walk you through a couple of metrics that I use to analyze my own deals.
Let’s start with cash flow…
There are a few definitions and calculations that are needed to understand cash flow. A lot of people make the mistake of thinking that rental income equals cash flow. Rental income is just the amount of money you charge your tenants.
CASH FLOW is what you bring home after everything has been paid. It’s very important to understand this distinction.
Okay so for example here let’s assume that you bought a rental property and you’ve got a tenant in this unit. After researching comps...you’ve determined that you are going to charge $1,500/month in rent.
Your monthly expenses on this unit add up to roughly $1,100/month. Once again this includes mortgage payments, insurance, taxes, and maintenance. So what is your monthly cash flow?
The answer is $400. Your monthly gross rental income of $1500 minus the $1000 in expenses equals $500.
The amount of cash flow you generate from a rental property should not be looked at in terms of total cash. Now just because you are making $400 a month doesn’t mean it’s a good investment. You need to factor in how much your upfront expenses were too.
First we need to calculate the annual return on investment.
In this example, the annual return on investment would be 12%. You take your annual income and divide that by the total investment ...so in this case $6,000/year in rent divided by the $50,000 cash investment equals 12%.
I’ve done plenty of deals myself, and I can tell you from first hand experience that a good annual return on investment should be anywhere between 10-15%. Anything above 15% is going to be really hard to find on a consistent basis so don't worry about finding those killer deals. They come when they come.
In comparison to other investment alternatives rental properties tend to have higher consistent returns than that of the stock market or any other type of investing. This is why you see successful investors in real estate.
The average returns that you can expect in the stock market is anywhere between 8-12%, however it is extremely volatile. In real estate however, you will see more consistent returns as long as you can keep your rentals occupied.
Okay quick recap....
Cash Flow is the amount of money your rental property brings in after all expenses have been paid. Total Gross Rental Income minus Total Expenses.
To know if this amount of cash flow is enough...you need to calculate your annual return on investment. This is calculated by taking the annual cash flow and dividing this by your total cash investment. If your ROI is between 10-15% then you’re in a great spot!
Okay that’s all for this one guys I hope it helped shed some light on how buy in holds really work!
DROP a COMMENT about what you thought about this video & what you wanna see next..until next time..
- Take care, comb your hair..
Cody Sperber, Clever Investor OUT! 😎
#RealEstateInvesting
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ABOUT CODY:
Cody Sperber is a real estate investor, cryptocurrency investor, social media influencer, and entrepreneur from Arizona that has successfully flipped over 1000 houses and is currently one of the largest investment educators in the world. He's been featured in Forbes, INC, Entrepreneur, Buzzfeed, and Huffington Post as well as on multiple episodes of Million Dollar Listing Los Angeles.
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