23 Jan Rental Property 101: Your Guide to Cash Flows
The most important aspect of rental property is making sure the return on investment numbers are met. The goal is to have expenses covered and leave enough leftover to provide a steady income to you. But how does this work out, and how much money should be coming in?
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The Rule of Thumb
Generally, a range of $100 to $200 per unit is standard in managing rentals. If you’re renting a duplex, aim to profit at least $200 a month – but potentially as much as $400 a month ($200 per unit) depending on the property value, area and market.
Remember – this is your money leftover after expenses and payments are deducted. Hitting cash flow targets can take some time to work out, but a process of analyzing the building, market and area will help you. A single-family home in a saturated market may only bring in $100 of income a month, while another single-family in a growing market may generate $150 or even $200.
The by-unit metric can be helpful, but it’s important to analyze your investment – making $100 a month off a million dollar investment certainly isn’t ideal. If you’re dealing with a higher investment or have more pots on the stove, consider cash-on-cash returns.
Cash-on-Cash Returns
This metric requires some basic math, but can ensure you’re turning a profit. Cash-on-cash returns utilizes the percentage of investment that’s made back each year in profit. If your investment cost $2,000 and you made back $250 in the year, that’s a 12.5% return on investment in one year’s time.
So, when it comes to measuring appropriate cash flow for rental property – the money you put in is a major factor.
Cash Flows by Return
The stock market averages returns between six and seven percent, but since real estate is a much more hands-on approach to investing, you will want to nearly double that. Aim for ten to twelve percent on returns – and the higher, the better.
Consider a $50,000 investment that makes $150 per month, or $1,800 a year. That’s a 3.6% return on investment for the year – only half the stock market average, and just over a quarter of what you should be aiming for. So, while the by-unit metric may be helpful for some – you could have potential for much more.
It’s also important to keep in mind the effort and labor that goes into real estate. Real estate is a hands-on business, and profits made should be worth the hassle for you. A $2000 investment that yields a $500 profit for the year offers a 25% return on investment, which looks like a sweet deal on paper – but is a $300 profit for the entire year worth the hassle of maintenance, repairs and making yourself available at all times? That’s up to you to decide.
Putting it All Together
Between the metrics shared above, you’ll want to aim for a minimum of $100/month per unit, but also for a 10 to 12 percent cash-on-cash return. If the baseline $100/month meets the return range, then great – but if it’s well below 10 to 12 percent, it may be time to tick those prices up.
As time goes by, you’ll want to aim for a 15% average rate of return. This number can be crunched by averaging the rate of return each year over the course of about a decade.
Remember – you want your investment to work for you, and be worth your time. Work the numbers now so you’re not regretting the investment later, and set yourself up to reap the benefits of investing in real estate!
