If you are investing in rental properties like me, you need to make sure you have a rental formula that works for the property of interest and provides positive cash flow. There are several different formulas that you should consider. One is a formula for calculating an offer price based on expected rent, one is a vacancy and maintenance formula, and another is a calculation on net cash flow/income generation on the property.
Simple Offer Price Calculation for a Rental Property
Some experienced investors have a complicated formula for calculating their offer price. While this usually lends itself to a better decision, I like to make a simple calculation first. If the bid price is going to be near this calculation, it might be worth it to continue estimation of repairs, etc. but sometimes you can just ball park the rest. But most investors like to look at a rental property this way:
1% x Offer Price = Expected Rental Price
This is a good rule of thumb to get you started. Now, I have offered on properties where I am looking at 1.5% or greater, in which case I don’t spend too much time estimating repairs. The cash flow is so good, you can absorb a goodly number of repairs and still make quite a bit of money.
Vacancy and Continuing Maintenance Equation
Another thing to consider is the vacancy rate and continuing maintenance that your new rent property will need. Here’s a general rule of thumb:
75% of the Rent is kept by the investor, 25% of the rent is spent in maintenance and vacancy.
Now I have seen the hassle and problems that surround renting properties, and I tend to lean toward 1 year leases, just to try to minimize issues related to vacancy, moving a renter out and advertising for a new one, etc. If you really need to get a property rented you might consider doing a 6 month lease, but I would focus on getting 1 year leases.
Net Cash Flow / Income Generation
I threw in this just for some additional help, but it shouldn’t be that hard to figure out.
Rent – Maintenance – Vacancy + Depreciation (usually 30 straight line depreciation) + Tax Deduction on Maintenance, Office Supplies and Mileage
So my recommendation is to take a part of your house as an office (for tax purposes), that way you can take all of your miles for any trips back and forth from your office (home) to all of your properties. You’ll have to recapture the depreciation on your home office when you sell your home, but its worth it.