HOW TO CALCULATE NUMBERS ON A RENTAL PROPERTY. The 8 categories you need to include.
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- Опубликовано: 20 апр 2020
- Learn how to analyze a rental property and calculate cash flow properly to make sure your next rental property investment has POSITIVE cash flow.
In this video Canadian real estate investor, Darren Voros shares with you the step by step real estate investing method for determining the monthly cash flow on a rental property.
Calculating the numbers on a rental property doesn't need to be difficult but novice investors often aren't including all of these categories and therefore their properties end up in NEGATIVE cash flow.
Why is it important that we can calculate numbers properly? There are 2 reasons.
1. We can identify if we have positive or negative cash flow
2. We can compare properties against one another
Sophisticated investors generally calculate their numbers using the method laid out here so if you’re not analyzing your deals or properties in the same way, you may think you’ve got a great property when in reality it could be far from it.
Darren walks through all of the categories he uses when analyzing numbers on a property and he'll also show you how much you should be buying a property for based on the cash flow analysis.
What is positive cash flow? Positive cash flow is when your monthly revenue is more than all of your expenses combined.
Why is positive cash flow important? Positive cash flow is so important to the equation. If you’re purchasing properties in negative cash flow (you're putting money in every month) you are banking on one element of the real estate market and that’s appreciation. The market is always going to go up. This is called real estate speculating not real estate investing. It’s also important because positive cash flow protects against rising interest rates, vacancies and unexpected circumstances such as the global pandemic we are currently going through.
Novice investors often only use these 4 categories when calculating cash flow on a property: Mortgage, Property Tax, Utilities, Insurance.
There are 4 categories that are missing from this equation. You'll need to include Vacancy, Property Management, Repairs and Maintenance and Tenant Gifts at a minimum.
Here’s the beauty of calculating this way. If you're setting aside money every month for these items and you don't need them, this is extra money in your pocket. If you do need them you've allowed for them and you won't be out of pocket for these expenses.
Darren will break down how much you should be allowing for each of the categories and how you can also figure out how much you should be paying for a rental property based on the cash flow numbers.
DISCLAIMER:
WITH ANY AND ALL INVESTING YOU SHOULD ALWAYS OBTAIN INDEPENDENT LEGAL, TAXATION AND FINANCIAL ADVICE FROM A LICENSED PROFESSIONAL BEFORE INVESTING ANY OF YOUR OWN MONEY.
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Darren, your version of this breakdown is by far the best I have seen to date, thank you for your detailed explanation on this subject.
Thank you very much. I appreciate the kind words.
I'm in the Voros rabbit hole of YT videos! Great content man. Thank you. I just came off the house hacking video you did because I'm starting that Feb 1st, moving from my T.O condo into my duplex on the Hamilton Mountain. Then came across this one and realized I wasn't adding 1 or 2 of those smaller added expenses. Plugged them in just now. Thanks Darren.
Haha I love it... the Voros rabbit hole of YT. I appreciate the kind words.
Congrats on the new purchase in Hamilton. We just sold a duplex there. Great area to invest in and love that you're house hacking. Such a great way to get going in REI.
Will be getting into real estate shortly, always had issues finding Canadian real estate educational videos, appreciate your help! Cheers will share 👍
Excellent! thank you!
Thanks for watching Rae.
That's a great explanation, I know it's been some time, the market has changed a LOT (at least in Canada), but it's a pretty good way to look at it (I am starting to study about it)
Another informative video, Darren. I shared with a friend who recently acquired a rental property.
Thanks so much Jenn!
very nice breakdown
Glad you liked it!
Great video Darren! I am looking to get my second investment property but given the crazy prices, do you think its best to wait? Thanks
Great video and thanks for sharing! I'm new to the channel and apparently you're from Hamilton??... I currently live in Toronto and am considering moving to Hamilton, getting to know the area first and then investing in it eventually
Another great video Darren! Always informative and love watching all your presentations.... If the rental
Property income is only covering the mortgage and Property tax and a very little leftovers, do you add up all the other expenses and claim the numbers at the end of the year when filing your tax?
Thanks Linda. To answer your question, yes! If you have legit expenses on the property that put you in negative cash flow I would claim that. It's only going to help you reduce your taxable income. Talk to your tax professional to see what your options are.
Great video! Excellent content and presentation Darren! Do you typically do a CapEx calculation or is this captured in your Repairs and Maintenance budget?
For example, a triplex has 3 stoves, 3 refrigerators, 3 washers and dryers. Replacing each of those 12 appliances at some point over the next 10 years (at an average of $900/appliance) would be an additional $90/month that should be budgeted. There could be other Capital Expenditures to consider depending on the property (eg. it might need a new roof in 5-7 years, new windows in 10 years, etc). What is your approach to planning for those costs?
Hey Trevor. Thanks for the feedback. Ya, I usually try to keep things relatively simple so I use a 5% R&M on my standard properties and that includes my CapEx costs. If it's an older property I bump it up to something that makes sense. I also let cash flow build into my reserve account until I have at least 6 months of expenses in there to make sure I can cover any unexpected costs if they arise. Hope that helps
Hi Darren, I have a rental property with a mortgage with the Bank. I also have some funds in the RRIF and TFSA. Is it possible for me to carry my own mortgage using the TFSA funds? If yes do you have a video or a book you can suggest. I live in Surrey BC. If you know any financial adviser I can see.
Hi Darren thank you for your helpful videos I am enjoying them all! I have a question for you- when you’re calculating cash flow ROI for a rental property, if you’re mortgaging 100% of the property (because you’re taking the downpayment from a line of credit for example) then it’s harder to achieve positive cash flow right? So CoC ROI also depends on your down payment or should we always compare properties/investments and assess positive cashflow on the basis of a 20% down payment? Thanks!!
Your ROI and CoC return should always be based on how much cash you have into the deal. Some investors will say if you're using a HELOC that it's the banks money so you will have a higher return. But you're right, you sill have to factor the cost to use that money in your calculations.
do u draw this up into a legal contract for your tenants to see?
No my tenants never see the ins and outs of my business.
The tenants are paying for their gifts, not you! How do you call that a gift ..?
Great to know , but it never helped me buy a house, because the price always came below what others are willing to pay to live in the house
I'm paying for the gifts out of cash flow yes but there's nothing saying I have to buy them gifts.
Not sure I understand the second part of your comment.
Thanks for watching.
@@DarrenVoros
Thanks
I do factor In all these categories when I submit offers, but it never works, price is always below wtat others are willing to pay
@@tryemc3026 Ah I see what you're saying. It's a simple numbers game. You just keep putting offers in for what you're willing to pay and at some point, you'll hit one. The market has been a bit nuts for the last 6 months though.
Hi Darren thank you for your helpful videos I am enjoying them all! I have a question for you- when you’re calculating cash flow ROI for a rental property, if you’re mortgaging 100% of the property (because you’re taking the downpayment from a line of credit for example) then it’s harder to achieve positive cash flow right? So CoC ROI also depends on your down payment or should we always compare properties/investments and assess positive cashflow on the basis of a 20% down payment? Thanks!!
Calculating ROI and CoC are two very different metrics. ROI is pretty simple though, regardless of whether the money is coming from a line of credit or cash it's still cash in a deal so your return should always be calculated based on your cash out versus cash in. You can't use a blanket 20% down metric if you have more cash into the deal than that. I hope I'm understanding your question correctly.
Thanks a lot Darren, I guess I was wondering when people say a good cash on cash return is about 8 to 12%, what down payment do they factor in? If you’re buying fully on credit then obviously your cash on cash return is going to be lower than if you’re buying with a big down payment. So in assessing whether or not your rental property is good in terms of cash flow is there a baseline or is there no such thing as a specific percentage that would be “good“? I agree that ROI is easier to use to compare properties/deals.
Thanks Darren! Would love if you did a video on cross-collaterization and when it is a good vs not so good strategy sometime.