One of the reasons people enjoy (and hate!) investing in the stock market is that it’s easy to know how your stock is doing. You can pick up your phone, check the stock price, and know exactly what your investment is worth. A couple extra clicks and you know how much you’ve made (or lost) and you can go to sleep (or stay up worrying) knowing exactly where you stand. The bad news is that investing in real estate is not that easy. The good news is that DL Financial is here to teach you!
When it comes to real estate, there are many different ways of figuring how your investment is performing. Over the next few posts we will focus on what we consider the easiest and most informative ways to look at property investment and calculate your Return on Investment (ROI).
The four calculations we will look at are:
- Cash Flow
- Capitalization Rate (Cap Rate)
- Return on Cash
- Total Return on Investment
Today we focus on Cash Flow!
1. Cash Flow – Just like it sounds, Cash Flow is the total amount of money that is going in or coming out of your investment. You calculate this by taking your total income for a month (or year) and subtracting your total costs. See below for a simple example using the house we want to buy on ROI Road.
The House at 1625 ROI Road (Cash Flow Calculation)
Income: $1,850
House rents for $1,850/month
House rents for $1,850/month
Costs: $1,416
PITI Payment (Principle, Interest, Taxes, and Insurance): $1,200
Maintenance: $120
Property Management: $96
PITI Payment (Principle, Interest, Taxes, and Insurance): $1,200
Maintenance: $120
Property Management: $96
Cash Flow = Income – CostsCash Flow = $1,850 – $1,416
$434/month or $5,208/year
$434/month or $5,208/year
A lot of investors look at Cash Flow as their number one investment indicator. These people want to invest their money and see the return come in straight cash. They are less concerned with the future growth of the property value and are more concerned with pulling money out of the investment today. This can be a great way to retire early, or create some passive income on the side. People get so passionate about Cash Flow that they even made it into a GAME!
Cash Flow doesn’t tell the whole story, however. What if I told you that the house on 1625 ROI Road was worth $10 million dollars? Is that the best place to put your money? To measure how our investment is truly doing, we need to take a deeper look at the numbers. We need to use other tools in our toolbox.
Next time we’ll look at Capitalization Rate (Cap Rate). This calculation will help us see how a change in a properties Market Value can effect how we view our Return on Investment (ROI).
Contact Us today for all your funding needs, including Loans, Project Finance, Bank Guarantee, SBLC, Letters of credit, DLC.
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