Investing in rental property is an exercise in calculating risk. Making a strategic decision requires you to learn as much as you can about its investment potential and expenses so you can assess its financial performance and profitability.
Diving deep into the numbers, market conditions and future cash flow projections will help you make an informed decision about a potential rental property in Columbus so you can keep your risk as low as possible.
Ways to Calculate Cash Flow
Cash flow represents the income generated from a rental property after deducting all expenses. The math on this is simple, but determining which numbers to plug into your formula takes some consideration. Here are a few things to keep in mind.
- Use a Pro Forma to calculate cash flow – Many property owners and landlords use a spreadsheet called a Pro Forma to help them make predictions about cash flow. There are numerous Pro Forma templates online or you can create your own. This type of spreadsheet has slots for property owners to input assumptions about their property and the rental market so you can have an estimate of what cash flow will be like in future years.
- Understand the impact of your assumptions – The results of your Pro Forma calculations will be directly related to the assumptions you input into the spreadsheet. When building out your Pro Forma, consider how these assumptions will impact future years’ cash flow potential. While your assumptions will more or less be guesses, you can play around with the numbers to see how certain assumptions will impact your cash flow more (or less) than others.
- Compare comps when predicting rental income – To predict rental income, one of the best things you can do is look at comps. Put yourself in the shoes of a prospective tenant to see what similar properties are renting for but remember that the properties and numbers you’re seeing online are homes that haven’t yet been rented. So, the rent you can charge may be slightly below what you’re finding online, but this exercise still gives you a good range of potential income you can generate on a similar property.
- Calculate recurring expenses – Expenses can be unpredictable, but there are several recurring costs you can predict with greater accuracy. For example, you may know what your insurance and property taxes are going to cost. Additionally, you can make educated guesses about other maintenance, landscaping, and legal expenses that you’ll predictably incur.
Predicting cash flow can be challenging, but there are numerous resources out there to help you. We’re also here to help. Our team at RL Property Management has been managing rental properties in Central Ohio for more than a decade, and we’re here to help you be successful with yours. To ask your questions, feel free to give us a call anytime at 614-725-3059.
