How to Analyze a Rental Property

There are several primary factors when analyzing a rental property. Two most important are:

  • Cash Flow – Cash flow is simply the money left after all the bills have been paid.
  • Appreciation – Appreciation is the equity gained as the property value increases.

This section focuses on analyzing cash flow.

A simple definition is: cash flow is the money left over after all the bills have been paid. It can get lots of people in trouble.

Cash flow is:

Income – Expenses = Cash Flow

Income may include more than just the rent. Expenses will include more than just the mortgage.
A bad example of calculating cash flow would be: Mortgage is $800 per month and the property will rent for $1,000 per month – so the cash flow would be $200 per month. False.

Don’t forget about a lot of other expenses, including:

  • Taxes
  • Insurance
  • Flood Insurance (if needed)
  • Vacancy
  • Repairs
  • Capital Expenditures
  • Water
  • Sewer
  • Garbage
  • Gas
  • Electricity
  • HOA Fees (if needed)
  • Snow Removal
  • Lawn Care
  • Property Management
    and more.

To calculate some of these items, most times you can easily call companies/agencies to find out the cost.

Example

Taxes – Call Local County or Do an online search on the county assessors page.

  • Insurance /Flood Insurance – Call an insurance salesman and ask for a quote.

  • Water / Sewer – Call water department or sewer department.

  • Garbage – Call trash provider.

  • Gas – Call gas company.

  • Electricity – Call electric company.

  • HOA Fees – Call the HOA president or hotline.

  • Snow Removal – Ask landlords what they pay or call a snow removal company.

  • Lawn Care – Ask local landlords what they pay or call a lawn care company for a quote.

This ‘investigation’ calculation will apply to every property and some properties will contain more expenses (items) than listed here. Don’t get overwhelmed though – the more properties you look at in your local area the more you will understand what the “normal” expenses are.

The process/calculation mentioned above is the easy part. You now need to determine other expenses like the vacancy, repairs, capital expenditures, and property management. But just because these numbers are difficult to nail down doesn’t mean we shouldn’t include them. Instead, we just need to use “averages.” And for that, we look at those numbers as a percentage and translate those percentages into dollar amounts.

What happens if you never budgeted for these expenses?  You lose all your cash flow.