If you’re looking to buy an investment property in the greater Columbus area, one of the biggest questions you likely have is how much money will the property make? On a monthly basis, what can you expect your cash flow to be?
When looking at cash flow, there are two major components to consider. First there is the income side, and then there are expenses.
In this post, we’ll walk through some important categories investors need to consider when they’re trying to predict cash flow or return on an investment property in Ohio.
Calculating your income
The cash flow coming in will primarily be from rent as well as any extra fees or expenses your tenants pay.
The first thing you need to do is estimate is how much the rent is going to be. We can help with that by conducting a rental market analysis. If you’re looking at a rental property in the Columbus area or within Franklin County and you’re not sure how much you think the rent should be, give us a call at RL Property Management.
Once you have the estimated rent, you need to discount for vacancy.
Most properties in Franklin County are running at around a 6-8 percent vacancy on average over the long-term. Some years you will have no vacancy at all because the tenant is in the middle of a two-year lease. Other years you’re going to have an extended vacancy. For example, you may have a few months where the tenant moves out and you’re getting the property turned over for the next resident.
To account for vacancies, we recommend discounting the rent by around 6-8 percent in your cash flow analysis.
Understanding your expenses
Here are some major categories you need to think about as you predict the cash flow for your investment property:
- Repairs and maintenance – This will be one of your biggest items. While it can be challenging to estimate, we encourage our clients to think critically about how they estimate their repairs and maintenance expenses. We often like to use a dollar-per-square-foot estimate rather than a percentage of rent. In our calculations we may estimate around $1-$2 per square foot, per year as a line item for repairs and maintenance.
- Capital expenses or reserves – You need to make sure you’re saving appropriately and setting aside funds each month to replace those capital items as they reach end of life. To learn more about how much to save per unit in reserves, read this post .
- Property taxes – This is a big item investors can sometimes inaccurately calculate. If you’re getting ready to buy a property, you need to make sure that you’re adjusting the property tax expense using the purchase price and not what is on the auditor’s website. It is likely that whatever they have the property appraised for is probably many years old if the property hasn’t been sold in a while. When you buy the property, the appraised value is going to go up, and then you’re going to be taxed on that new rate – and that could be double the current rate.
- Insurance – Shop around and get some quotes for insurance on the property.
- Landscaping and snow removal – A lot of out-state investors may not realize how much snow we get here in Central If you’re buying a multi-family property, especially if it has a common area or parking lot, you’re going to have to pay to have it removed every time there it snows. Additionally, there will be expenses related to other landscaping needs like cutting the grass.
- Pest control & other unexpected expenses – From time-to-time rodents may infiltrate the property and need to be dealt with, or other incidental expenses pop up.
Predicting cash flow for a property takes some critical thinking and an understanding of the local market. If you have any debt, you’ll need to account for that as well as the above-mentioned categories. If you have questions or need help with any of your rental units, get in touch with us.