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Playing The Real Estate Rental Game

Playing The Real Estate Rental Game
Copyright 2006 David Schneider

Real estate investing is a game. To play it well you must
understand the four financial benefits of real estate and
how to maximize them. Those benefits are:

1. Cash flow
2. Equity build up (the payoff of your loan)
3. Tax benefits
4. Potential appreciation

In this article we are going to look at benefit number one.

Benefit number one – Cash Flow (cash flow before tax).

Investing in real state is game of numbers. To play the
game well you must understand how to manipulate the numbers
to get the end results you want. The result being positive
cash flow.

The formula to calculate the cash flow is listed below:

Gross Rental Income
Minus: Vacancy
Equals: Adjusted Gross Income
Minus: Operating Expenses
Equals: Net Operating Income
Minus: Debt Service Payments
Equals: Cash Flow Before Taxes

Here is an explanation of each of the factors in the
formula above.

Gross rental income is the first number that you need. It
includes all the rents and any other miscellaneous income
from garage rents, laundry machines or vending machine.
This number is that total income that we expect to get
during the year.

Vacancy is a percentage of the gross rental income. It is
based on that you won’t collect from of the rent that is
expected because of bounced checks, evictions and vacant
units during the year. This percentage will vary depending
on the supply and demand for rental in your area. I
commonly use a 5% vacancy factor when I don’t have any data
to determine this. It is important to ALWAYS have a vacancy
percentage. Many times the seller will tell you that they
have had no vacancy. It is just not true because people’s
lives change. They get divorced; lose their jobs and other
changes. This causes them not to have the money to pay rent
and creates vacancies.

Adjusted Gross Income is the actual money that you are
going to receive.

Operating expense are all the costs that apply to the
property each and every year other than the loan payments.
It includes things like taxes, insurance, repairs,
utilities that you pay and any other expenses.

Net Operating Income is that amount of money that the
property produces after all operating expenses. This is the
most important number because this is the number use to pay
any loan payments. This is also the number that we use to
determine the value of the property (more about this later).

Debt Service Payments is the amount of payments that you
spend per year for any loan that you have on the property.

Cash Flow Before Tax is the amount of money that is left
over after you have paid EVERYTHING. This is the amount of
money that is you get to keep for your self.

Ok, now that I explained what all the numbers are, here are
the keys to creating more cash flow. There is only
basically two ways to do it. You have to get more income by
increasing the rents and/or reducing vacancies losses or
you need to reduce your operating expenses and /or your
loan payments.

If you are buying, it obvious that by paying less for the
property would mean that your loan should be less,
therefore your loan payments should be less and should give
you more cash flow.

It is extremely important that before you every buy any
rental real estate that you look at the cash flow and you
should run the numbers using three different scenarios. The
best case where you rents are high and expenses are low,
the worst-case scenario where the rents are low and the
expenses are high and then a middle scenario. If the
worst-case scenario still makes sense then the property
should be a no-brainer and you should go ahead and buy.


About the Author:

Dave Schneider has been investing in real estate for over
25 years and is devoting to helping landlords make more
money! For free mini e-course on how to use the number to
make sure you never lose when you invest in real estate
visit:
http://www.rentalrealestatesoftware.com/track/article1.php

posted by vendingrunet @ 9:53 PM