Evaluating the performance of your real estate investment is always a crucial step in earning as much as you can on the property. There are a few steps you need to look at to determine if your investment is truly performing.
Review Monthly Cash Flow
The clear and obvious thing you need to look at is your monthly cash flow. Look at your rental income versus your expenses. To add up your expenses you must include your debt services, taxes, any HOA fees, insurance, and maintenance.
Estimating maintenance
The most difficult thing to budget for is maintenance. Past repairs can be used to get a general indicator of future expenses. You always need to account for the larger items like carpet and paint, which will need to be replaced every five to eight years.
Your property’s age will also impact your maintenance budget. In the first five years that a home has been built, you’ll have fewer repairs. When the age of your property reaches the 10-15 year mark, you will have more repairs. Smart investors will have already evaluated the cost of adding new appliances and air conditioning units. So, it’s possible that a 20-year-old property will have fewer repairs than a 15-year-old property because certain things will have been recently replaced.
Generally, you should put 10 percent of your rental income away for potential maintenance costs. If you can do that, you are probably working with a safe number.
Management and vacancy expenses
Management fees are also important when you’re factoring your cash flow. If you pay a percentage of your rent, convert that into a set dollar amount. It is much easier to be translated that way. Also, do not forget to budget for vacancy. To be on the safe side, you should budget at least five percent for that.
That sums up the cash flow part of the planning for your investment. Whether it’s positive or negative, that’s only one part of the return you’re generating on your investment. There are other ways to make money on your property.
Annual Tax Benefits
You can expect a tax write-off every year. You own your property and you depreciate your assets. Remember that properties in a tax deferred entity such as a 401K cannot be depreciated.
Equity and Appreciation
Through acquisition, you may have earned some equity when you purchased your property. By buying it under market, you effectively captured equity. That needs to be annualized and added into your calculations.
Analyze the appreciation on your property. We can always provide a complimentary market analysis to see how much value your property has gained since you purchased it. If you are estimating the appreciation for the future, a good number to use would be three percent for the years to come.
Loan Balance Reduction
Calculate how much your loan balance has been reduced through the years since you purchased your property. This is a number you can forecast for the future. Check your monthly mortgage statement.
These are all ways you can be making money on your investment. A small negative cash flow should not stop you until you evaluate all the different income streams added to your return. You need to look past the performance and see the total investment picture.
When investors ask us if the investment they currently have or they are thinking of purchasing is a good one, we tell them to look at it as a three-legged stool. Out of these five ways we’ve discussed for making money (cash flow, equity, appreciation, tax benefits, and loan reduction), if three of the sources are generating income, then the property is probably worth having.
If you have any further questions, please contact us at Service Star Realty.
