So, a common question we receive from investors, is “How Much Cash Flow Can I Expect in Cleveland?”
Generally, investors that we work with want and expect around $200-$300 per month in cash flow for single family homes. However, more recently, Investors seem to be finding numbers in the $100-$150 range (if financing).
Calculating cash flow is one of the most important and basic calculations you can use to evaluate rental real estate.
It’s basically just understanding two big buckets: Income and Expenses.
Simply put, to calculate cash flow, you use the following:
Cash Flow = Total Income – Total Expenses
Sounds easy, right? Well, it should be, if you have a good grasp on both your income and expenses.
Calculating Income for Your CLEVELAND Investment Property
For your rental income, let’s say you purchase a single family home that will rent for $1,000 per month. So, your Total Income for that property should be $1,000 per month.
Calculating Expenses for Your Investment Property
Now, expenses can be more difficult to understand, because there can be all kinds of expenses to consider. Some of these expenses could include:
Property Management fees
Reserves for capital improvements
City registration fees
Utilities that could be your responsibility
For our example, let's assume you have monthly expenses in the amount of $725.
So, your cash flow would be $275 per month.
Self-Managing Your Investment Property
If you choose to self-manage your property, you could run into additional expenses, including:
Attorney fees to create a lease and consult on any numerous landlord-tenant issues
Advertising fees / Tenant Screening / Software
Fuel to show the home and conduct move-ins/move-outs
Clearly, there are some factors you need to consider when assessing your cash flow.
1) Always budget for vacancy. Most people feel that 5% is a good number to use for single family homes. I think 10% is more accurate. As we've discussed, vacancy is a cash flow killer, so it’s important to keep your Tenants happy and avoid the one-year-and-out scenarios.
2) Cash flow will not be evenly distributed. When we say that investors here in Cleveland expect $200-$300 per month in income, we don’t mean that they will receive that amount every single month. Cash flow can vary significantly from month to month and from year to year.
For example, there are some months that you may have no maintenance at all, and then you might have a month where you have a $700 furnace repair. Generally speaking, you should budget 10%-15% of your income toward maintenance costs for a newer home in relatively good condition. For older homes, you should budget closer to 20% or even higher in very old homes.
3) Plan Ahead. Once you’ve set-up your budget and have a good idea of the cash flow you should expect, I suggest adding a cushion to your expenses – maybe as high as 10%
of your income – to help account for unexpected expenses. If you don’t end up using this money, I suggest adding this extra money to your reserve account to help pay for those
unexpected expenses down the road or capital improvements.
As always, please don't hesitate to contact us with any questions.