Thursday, 11th September 2008

Positive cash flow from investment property

Written by George Traganidas Topics: Property Investing

Positive cash flow

For a long time I was searching to find a way to calculate if a property is profitable and I should buy it. I was looking at the cash flow and at the value appreciation of it over the years.

Many property investors were talking about the importance of being able to cash flow a property and the need to have a positive cash flow at the end of the month (or at least a break even). What no one was telling was what you need to include in these calculations. So, after a lot of search here is an extensive list of items to include in the calculation. This list is quite strict and you might need to relax some of them. I have included here everything for the benefit of you and you can make the call if you want to ignore some things. But do it with your eyes open and knowing the consequences.

Income:

  • Rent – The rental income that you get from the property
  • Other – Any other forms of income that you might get from the tenants

Expenses:

  • Mortgage – This is the mortgage that you pay to your money lender.
  • Management fee – This is a fee that you pay to a management company that takes care of the property. They deal with everything and you just get the money at the end of the month. This value goes between 12-15% of the rental income. If you chose to manage it yourself, you do not need to include this.
  • Ground rent – Rental that you pay if the property is leasehold.
  • Service charge – Amount you pay to a company to manage the communal areas of flats.
  • Building insurance – Insurance that you pay for the structure. Sometimes this is included in the service charge, so be careful not to include it twice.
  • Repairs – General repairs to your property. This will not occur every month, but you should save every month for the one off expense that will cost you £3,000.
  • Void periods – Periods of time that you have no one renting the place and you have no income. This will usually be between 2-4 weeks.
  • Collection failure – This is the failure of you (or the management company) to collect the rent from the tenant.

As I said above this is an extensive list. Based on the above calculations 99% of the properties that I find do not give you a positive cash flow. The above list is very strict. Now what you have to do is tailor the list to your specific situation and make sure that you have a very good idea on why you do not include some of the above charges.

When you talk with professionals to get the financing for your property, they will ask you about the above points. When you have studied them, it shows that you are a professional and you are serious about business. Even if you exclude things from the list, when you have a good reason for doing so, they will respect your professionalism.

Follow the Practical Way,
George

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