Discover If your Property Has Positive Cash Flow With This Simple Method
What is Positive Cash Flow?
In Real Estate Investing, positive cash flow typically refers to when the income you get from your rent is greater than your expenses.
For example, for a $300,000 apartment, your monthly expenses would include:
- Mortgage payment is ~$1425 (3% interest rate, 25 yr amortization, 20% down payment of $60,000)
- Property tax ~$200
- Home Insurance ~$50
- Strata Fee ~$300
- Utility Bills ~$100
The total would be $2075. If you could rent the property out for $1900, you’d be generating $175/mo of negative cash flow. If you rented it out for $2075, you’d be breaking even. If you rented it out for $2500, you’d be generating a positive cash flow amount of $425.
Your goal is to look for income producing properties where the rental rates are high enough to pay for the mortgage and expenses AND pays you a small amount of positive cash flow every month.
Think about it, you buy an apartment with only $60,000 down and your tenant pays for your mortgage. Not to mention, your apartment in the long run will appreciate in value.
Don’t forget that rent goes up over time so you’re generating more and more positive cash flow over time.
But let’s say for argument sakes that the property doesn’t appreciate a single dime after 25 yrs and you didn’t increase the rent at all over 25 yrs. Your mortgage is paid off. You own a $300,000 apartment where you only had to pay $60,000. In 25 yrs, your tenant paid $240,000. This is equal to $9600/yr for 25 yrs.
But Gary, I still had to put down the $60,000…
Correct, you put down $60,000. But your positive cash flow of $425/mo, equals to $5100/yr. $5100/$60,000 = 8.5% ROI (Return on Investment) à Way better than the bank’s interest rates, don’t you think?
For advanced positive cash flow calculations, you can incorporate the fact that on top of the tenant paying your mortgage, half of that payment to the lender is going towards the principle of the loan.
As well, in advanced positive cash flow calculations, you would factor in a vacancy allowance, approximately 8% of the rent.
If you’re new to real estate investing and you’d like discover where the best property investment deals in Vancouver are from one of the top realtors in the local area. Then call Gary today at 778-862-9787 or fill out this simple form.