After owning our rental property for 7 months, I’m more convinced than ever that a good rental property is one that cash flows from day 1. Truth be told, there are so many things that can go wrong with rental properties that I need a healthy profit margin as a buffer against any unforeseen maintenance issues or vacancies.
Every type of investment involves some level of risk but, as is the case with my dividend stocks, I expect my rental property to pay me a nice chunk of monthly income after all expenses to compensate me for my investment.
For me, the regular income component of owning a rental property is the only thing that really matters. Sure there are certain tax advantages that I discussed in an earlier article, there is the mortgage principal pay down and even some potential for the property to appreciate in value.
But In my assessment of a rental property, I ignore any potential appreciation of the property because I’m not interested in paper gains. The fact of the matter is that a person only realizes a gain once the property is sold after all closing costs. These days, the real estate market isn’t exactly cheap so I take any property appreciation with a huge grain of salt because what the market giveth it can easily taketh!
As an example of the importance of cash flow, here are the financial details of my rental property investment:
Gross Rent: $1600
Mortgage principal and interest = $520.00
Property Taxes = $117.67
Insurance = $65.15
Property Management = $126.56
Grounds Keep = $56.50
Water Heater Rental = $43.24
Total Expenses = $929.12
Potential Profit = $670.88
After all fixed expenses, I turn a profit of nearly $671. This profit is crucial to the success or failure of the my rental property endeavour because, without it, vacancies and maintenance issues can quickly turn the property into a bad investment.
I’ve owned enough properties to know that all sorts of things get broken, wear out or need replacing, so that $671 profit gives me a nice buffer against unforeseen expenses.
My goal in owning the rental property was that it must pay for itself and with that level of profit, I can easily afford to replace the roof, a furnace, some windows etc. and break even or maybe even turn a small profit for the year.
If any of you are considering rental properties as investments please do your homework and remember that cash flow is key.
If you liked this check out my other articles on rental properties: