These are the three ways you can make money owning Rental Real Estate, and exactly how to calculate your cashflow and profit – enjoy! Add me on Instagram / Snapchat: GPStephan
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So lets start here…the three ways to make money in real estate:
The first is net cashflow. Anytime you calculate cashflow, you have what’s called the “gross rent.” This is the TOTAL amount of rent you receive. So if you rent out your house for $2000 per month, that $2000 is the “gross rent” – it’s before all of your expenses. And unfortunately, anytime you own real estate, you have recurring expenses – for instance, you have property taxes. Insurance. Repairs. And at some points there will inevitably be vacancy when the house isn’t being rented, but it’s still costing you money to own. These are inevitable.
So the first step when calculating your net cashflow is to DEDUCT all of those expenses from your total rent. So even though you might get paid $2000 per month, after all of those expenses eating into your money, you might now only be left with $1200. Any time you see real estate returns calculated, it’s usually like this – and this is often referred to at the “net operating income.” Total rent, minus all expenses = net income. So you’ll need to understand what property tax rates are in your area, how much insurance roughly costs, how much you can realistically get for rent, and how quick you can generally rent out a unit.
One thing not generally included in those calculations is the mortgage payment. This is because mortgages numbers can vary wildly from person to person depending on how much money you put down, how long of a loan you get, and at what interest rate. But, in almost every situation, your mortgage will be an additional expense in addition to the total rent you receive.
The second way to make money in real estate is by equity. This means that the value of the property increases because of something you’re doing to it – and there are two ways to make money this way:
1. The first and the most common is by paying down your loan. In most situations, your loan is broken up in two categories: principle and interest. Any time you pay down the loan every month, part of it pays interest on the total balance of the loan, and the other part pays down the balance – that second part is equity in the property.
2. The second way to make money with equity is by actively increasing the value of the home. Often this means remodeling the home or adding square footage. And your equity is the difference between the amount you spent, and the new value of the home after renovations. Doing this is also generally pretty predictable. You can see other properties and what they’re selling for, and as long as you make yours similar to that, all things considered, you should get about the same price – and that’s profit.
The third way to make money in real estate is through appreciation – this means that over time, the value of the property goes up in value. This one is highly location dependent – some areas will go up as fast as inflation, just given the cost of materials to build a house get more expensive over time. This is fine, because it means your money doesn’t really lose any value – it’s simply a preservation of wealth. But other areas will go up substantially more depending on the demand for the area, and how much space is available to build.
Using a combination of these three can often give you a much, much more accurate idea of your total rate of return much beyond cashflow – and this is how you calculate your returns and evaluate a good deal while owning rental property!
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