When searching for rental properties one has to be concerned about one thing and that is cash flow or better known as net profit. How does one determine net profit for rental properties? How do you know when this home is for you? Well there is a simple formula and in many ways purchasing rental properties can be easier than buying your personal home.
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Evaluating Investment Properties
Monthly income for rental properties:
Monthly income for rental properties is the total rent roll. Establishing a current market rent roll is where a real estate agent can make or break your investment. Make sure the rental property is properly evaluated for current as well as future rent potential. Work with an experienced agent it can only benefit you in the long run.
Monthly expenses for your rental properties:
Common expenses for rental properties are property taxes, insurance, property management fee, mortgage or financing, homeowner’s association fee (HOA), vacancy and repairs. Don’t forget vacancy and repairs! They are a real part of any property investment and they can drastically affect the cash flow.
Cap rate for rental properties:
Cap rate is a percentage of purchase price and an indicator of whether or not you have a “good deal”. The higher the cap rate the better your investment. Your mortgage payment is NOT part of this equation.
Cash on cash return on rental properties is the return you are getting on the money you invest. If you pay all cash for your rental properties, this number will be the same as the cap rate. If you are financing, this number is the most accurate way to see the actual return on your cash investment. Include the mortgage payment since this formula is totally focused on financing.
Understand the difference between cap rate and cash on cash return. Cap rate is how good of a deal you are getting and cash on cash return tells you the exact return on your money. They are the same for an “all cash” purchase, but can be very different when leveraging rental properties.
If interested in purchasing Northern New Jersey rental properties lets get in touch, contact Gerri Leventhal.
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