Does it Cash Flow?

If you’ve ever dreamed about owning an investment property and don’t know where to start, I thought it would be helpful to do a simple example of how to think about cash flow.

There are much more robust versions of this exercise (happy to help – contact me for a Ron & Don Sit Down). But this will show you the basic concepts.

1) What is your goal?

What is the purpose of your investment property and what do you want to get out of it? Some people want a long term renter and if they break even, that’s a success. Others want to put in the effort and maximize the income on the property with shorter term rentals. It’s important to know what your expectations are.

2) Pick a property.

Start by picking a property that you think would make a good rental. At this stage, just find a few listings to run through this exercise.

Here’s a house I chose in Tacoma.

3) What’s your debt service?

Debt service is what your cost will be month in and month out for your mortgage. It’s commonly called PITI (Principal, Interest, Taxes, Insurance) For this house – conventional mortgage with 20% down, you’re looking at $4,018 a month.

It’s important to note that there are other expenses to owning a rental property and it’s up to you as the landlord to negotiate with tenants. Who pays the utilities? There will be vacancies – 10% is a reasonable number to use to estimate that cost. Are there any management fees, accounting fees, permits and supplies you’ll need to maintain the property? If we think this house is a good candidate, we can do a deeper dive on the other costs.

For right now, let’s just stick with the $4,018 a month.

4) Long Term Rental Income

What do similar houses in the area rent for? I went to Zillow Rents and put in the zip code.

For this zip code, there is not a house that gets $4,018 a month as a long term rental. So if this is your goal, you have two choices: increase your down payment till your PITI is under $3k or move on to another house.

5) Short Term Renal Income

What about using this property as a short term rental? Obviously you’d have to furnish the house, and this requires more effort as the property owner. You can do 30 day rentals or shorter term rentals.

This first screen grab is from Airbnb in the zip code for the entire house. Here we start to see numbers above $4,018 a month. The next step would be to stack up the level of finishes and number of beds compared to the listings and estimate what you would get per month.

This is a weekly rental in the same Zip. The range is $126-$232 a night in the Summer. So let’s estimate this at 23 days a month occupied. $2898 – $5336 is the range.

Does it cash flow?

So you can see pretty quickly if a house will perform the way you want it to. 

With this specific property, it would NOT work as a long term rental with standard financing assumptions.

It could work as a short term renal if the property will land in the higher part of the range of listings.

There are many other factors that are important to think about when owing real estate – equity, tax benefits and length of ownership are the most important, but this is a good primer on how to start to think about a property as an investment.

If you want to game plan about your real estate ambitions, let’s do a Ron & Don Sit Down. WE SELL THE SOUND.