Doing a Cash-Flow Analysis for a Rental Investment

Before purchasing a rental investment, savvy investors complete a cash-flow analysis to assess its profitability. A simple-cash flow analysis using rent projections and expenses is very effective for small properties.

Projecting realistic rents is the key to an accurate and successful cash-flow analysis. If you purchase the property and cannot get the rents you thought you would, then you are stuck with a cash-sucking investment. 

Compare the rental units with others nearby. Note the characteristics of the properties and the overall market:

  • Size of each unit
  • Condition of each unit
  • In-apartment and common area amenities
  • Applicable rent regulations
  • Market vacancy rate

Next, create a schedule of expenses, which may include these:

  • water bills
  • insurance costs
  • common area electricity
  • heat
  • real estate and other taxes
  • repair and vacancy allowances
  • legal costs
  • landscaping and maintenance costs

Subtracting operating expenses from projected income gives expected "net operating income" (NOI). This is the amount left over for servicing debt on the property. Use a mortgage calculator to project the mortgage payment for the property. If the NOI cannot cover the mortgage payment, then the rental investment will not pay for itself at that purchase price. Adjust your offer accordingly. If the seller will not negotiate to the price you need, be prepared to move on to the next prospective investment.

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