I’m getting closer and closer to buying my first piece of rental property (really I am!) and one thing I’m not quite sure of in the pre-offer phase is how to get a good idea as to whether or not there will be a desirable cash flow. I used to think there was just mortage minus rents plus a little extra for “costs,” but I’m looking for a more accurate formula that includes things like potential vacancies, other costs, taxes, and whatever else there is. I hear about new stuff all the time, like debt service, ground rent, etc. that sound like they could turn a seemingly good deal into a negative cash flow deal. I would appreciate any help, especially anything with “rules of thumb” or “average percentages”
I’d stay away from townhomes and condos as they can eat a cash flow up with homeowners association dues as some places charge like $50 a month to $150 a month. To me what is reasonable is $150 a year for a nice SFR community, then I’d throw that in there also.
The only thing I would add to the formula above is management fees. You will eventually want to get paid for the time you spend managing these properties or pay someone else to do it so that you can spend your time on finding more deals. A good rule of thumb is 8% of the rent.