Determining Actual Cashflow
Without planning ahead like this, rookie landlords often get caught in rough situations where there simply isn’t enough money to deal with a big problem.
Here’s how a beginning landlord sees it:
Rent Upper Unit: $1,100
Rent Lower Unit: $800
Total Rent: $1,900
Total Expenses: $1,425
Total Cashflow (Income – Expenses)
This is pretty typical and the $475 then goes directly into the landlords hands as profit. However, this doesn’t help you long term. Especially if you plan to expand or avoid future expenses.
To avoid falling into a trap, I’d suggest you should change your projections a bit and make it look like this (of course use your own numbers!):
Vacancy Reserve (current vacancy rate % x 2, so 10% of monthly income) $190
Repair Reserve (approximately 5-7% of monthly income) $95 (I used 5%)
Revised Total Expenses: $1,710
Actual Cashflow: $190
So you don’t end up like the US government and have to borrow money to pay your expenses! Lack of long term planning and understanding future costs and expenses is wreaking havocs on governments and individuals throughout the world. You can do better than that.
Plan Now For The Future of Your Property
If you plan in advance and understand you will have vacancies and also understand you will need to do repairs and that you can create reserves so money doesn’t have to come out of your pocket later, you will learn to sleep much better at night. That’s what the second example shows.
The real trick is to take those reserves you are budgeting for and move them into a separate reserve account so you don’t accidentally spend them. Once you start thinking like this you will no longer feel like you are blindsided or trapped when vacancies or repairs start coming up and it will change how you look at your properties.
Remember, Properties are not short term ATM’s, but rather long term investments.
Advanced Landlord Tip
If you have steady tenants for an extended period, this reserve can build up, so we like to put a cap of around $5,000 on a property. Once the reserves break that dollar amount, it all becomes pure cash flow again like the first example. Or……
If you are buying a new rental property, we start with a $5,000 reserve fund that we use as our cushion. That provides us with the higher cash flow right from the start. Then if we do have vacancies or repairs, we draw money out of the reserve and then revert back to the lower cash flow amount until the reserve is topped up again.
Can you see how this takes the stress out of owning property? Once you start implementing a system like this and get used to it, the pressure of having to take the first available tenant just to fill the property evaporates. It affords you more time to choose the proper tenants and doesn’t affect you directly where it hurts, in your bank account!
Is this something you are already doing? If it is great I would love to hear how it’s working for you, if it’s not, when will you be starting?