How To Invest In Real Estate: The ULTIMATE Guide to Calculating Cashflow (EASY)

What's up you guys? It's Graham here. So I realize that this video is very, very, very long overdue because I've been making three YouTube videos every single week for over two years, and I've yet to make a video about how to analyze the cash flow of a rental property. That's not cool, and that needs to change.

Today, this is really meant to be your go-to video to show you exactly how to calculate the cash flow of a rental property to make sure it's even profitable. This is also what I look for anytime I invest in real estate. And by the way, this is probably the most important step anytime you're looking at investing in real estate. It's this one simple calculation that tells you everything you need to know about the property.

Also, I just want to say a huge shout out to Brandon over at BiggerPockets. I saw his video on how he calculates the cash flow of a rental property, and that gave me the inspiration to make this video and give my own take on it. So I will go ahead and link to his video in the description for anyone else who wants to check that out.

So go ahead, sit back, relax, make yourself comfy, smash that like button, subscribe if you're not subscribed already, and let's get into the video.

So let's go ahead and start from the very beginning. The first step you need to do anytime you're calculating the cash flow of a rental property is to calculate what's called the gross income. Gross basically just means the total income of a property before any expenses.

Now when you have gross income, there's typically two types of gross income you're going to be looking at anytime you're looking at a property online. The first is what's called the actual income; the second is what's called projected income. Actual income is just how much the property is currently making right now with actual rents.

Now typically when you see actual income, this just means that the building is currently being rented out, and this is the actual amount of rent that the owner is receiving from all of the units. Now that is the type of information that we want to see as real estate investors. But wait a second! Because then we have that second type, and that is projected income.

This is something you're probably going to be seeing all the time if you're looking at properties online. This is basically just the projected amount of rent they think they can get if the unit becomes vacant and you rent it at current market rates. They're pretty much just telling you that this is how much I think this unit would rent for if our current tenant moves out, and you go and get a brand new tenant in there. This is how much that unit we think is actually worth.

Now when it comes to me, I always just ignore projected income. Whatever they tell me the unit's worth, whatever they tell me they can get for it, I just ignore it. Now the reason for this is because you actually need to do your own calculations to determine what the unit can actually rent for and not listen to the owner. Because I'll tell you most of the time, the owners that tell you projected incomes are being very optimistic and very generous about what their unit is actually worth.

So don't ever really believe what they tell you here; it's just a very rough estimate, so just move on. So with that said, I'm gonna put up some really fancy Photoshop stuff here that took me forever to do. So if you wouldn't mind just hitting the like button because this took me hours to do that, that's it! That would make my day, that'll make all this editing worthwhile, which is the like. So thank you very much; let's go to the fancy Photoshop here on the screen now.

So let's just say we have a building selling for three hundred and sixty thousand dollars that has three units, and each unit is being rented for one thousand dollars. This means that the gross rents that the building is getting is three thousand dollars per month or thirty-six thousand dollars per year.

Now, in addition to the rents, it's also very important to identify any other income sources that that property might be generating. For example, some properties might have laundry income; other properties might charge for storage, and they have storage income. Other properties might have parking income. So if that's the case, just add any of that additional income on top of what the property is receiving in rent.

For this example, let's just assume that the owner is not gouging the tenants for additional services and all of that is included in the rent because the owner is a nice guy. So let's just assume for this that all of those are going to be zero. Okay, so there we go! Now we have the gross income. We're almost done, not really, but we finished the first step. Now we just need to get to our second step, and that is expenses.

See, anytime you buy a property, you're going to have what's called fixed expenses. This means that these are expenses you're going to have no matter what. Even if you bought the property in cash, you have no mortgage; you're going to have these expenses. That's why I call them fixed expenses. These expenses include property tax, and there's no way around that one as far as I'm concerned.

Then we have insurance—you should probably have insurance. Then you might have the cost of a homeowner's association, which I don't like; HOAs. Then you might also have utility charges if you're responsible for paying some of those for the tenant, in which case they better be saving that water. Then you'll probably also have normal upkeep, like a gardener, maybe some pest control, or anything else like this. Then you'll also have the inevitable repairs that will eventually need to be done at some point or another.

You'll also have management fees if you decide to get a property manager. Finally, you're gonna be having some vacancy, which is when a tenant moves out, the unit's not being rented, and you're losing out on some income.

So now let's fill in some of these examples for our building. Let's just say the property taxes are going to be three hundred and sixty dollars every month. Insurance is going to be another one hundred and fifty dollars a month. Let's just assume that there's an HOA and that's gonna be fifty dollars a month. We'll assume that the tenants pay all of the utilities, so that is zero dollars a month. You also pay fifty dollars a month for the gardener because the HOA is too cheap to afford one.

Then let's say the repairs are about one hundred dollars a month because your tenants are a little bit clumsy. Then you'll pay an additional two hundred dollars a month in property management because ain't nobody got time for that. Finally, we'll throw in the additional one hundred dollars per month for the average vacancy just as an example.

That brings our total fixed expenses to one thousand and ten dollars every single month. This means that even if you own the property outright, you bought it cash, you have no mortgage—you’re straight ballin' and hard—you're still gonna have the fixed one thousand ten dollars per month in expenses no matter what. Unless of course, you decide not to pay your property taxes, or pay your insurance, or do any repairs. Don't do that.

So anyway, now we calculated our gross income, we calculated our fixed expenses. Now it's time to figure out what our net rental income is going to be. The net rental income is basically calculated by taking the gross income and subtracting our fixed expenses. And there we have our net rental income.

So in this example, we take our three thousand dollar-a-month gross rent minus one thousand ten dollars per month in fixed expenses, and that brings us to one thousand nine hundred and ninety dollars per month in net rental income. If you ended up buying this property cash outright, you don't have any sort of mortgage—well, there you go! There is your cash flow.

You paid three hundred and sixty thousand dollars for a property that makes twenty-three thousand eight hundred and eighty dollars per year, and that means you're getting a six point six three percent return on your money. Now, how did I calculate that? All you need to do is divide the net rental income by the price you paid for the property and then multiply that number by a hundred.

What you have left over is your percentage return. This is also what's referred to as the cap rate of a property. But it doesn't stop there because if you're a smart real estate investor, you know that it's better to get a mortgage and leverage your money to get an even higher return.

So I'll explain how you can actually get this property to pay you more than a ten percent total return on your money just by getting a mortgage. In our example here, I'm assuming that you're putting twenty percent as a down payment on the property, and then you're financing the rest at a five percent interest rate over thirty years.

Now, to calculate this, I use a website called mortgagecalculator.com, and you basically just plug in all the numbers, and it gives you whatever the results are. So I'll just put the screen share of the website here, and we'll do this right now.

So first of all, we got a three hundred and sixty thousand dollar home value. We'll put a twenty percent down payment here. We'll assume the interest rate is five percent—that's for a thirty-year loan—and then we'll leave the rest of this all blank. Then we hit the little calculate button, and that gives us a total payment of one thousand five hundred and forty-six dollars per month.

So now what we end up doing is we take our net rental income after all the expenses of one thousand nine hundred and ninety dollars, subtract our mortgage payments of one thousand five hundred and forty-six dollars, and that gives us leftover four hundred and forty-four dollars every single month after making the mortgage payment.

Now, here's how we calculate your return because remember, you put seventy-two thousand dollars as a down payment to buy this property. Well, the thing is, anytime you buy a property, it's never just the down payment when you buy it. There's always closing costs associated with that property. So let's just assume that the closing costs on the property are going to be equal to one percent of the purchase price, and that would be three thousand six hundred dollars as our closing costs.

This means your total investment at the property is your seventy-two thousand dollar down payment plus your three thousand six hundred dollars in closing costs, and that brings the total investment to seventy-five thousand six hundred dollars. There we go—math for the win!

So that means you invested seventy-five thousand six hundred dollars to make a monthly net return of four hundred and forty-four dollars every single month, and that also works out to be five thousand three hundred and twenty-eight dollars every single year.

Now, we do basically the same calculation that we did before. We take our net rental income of five thousand three hundred and twenty-eight dollars, we divide that by our total investment to buy the property, which is seventy-five thousand six hundred dollars, and multiply that number by a hundred. And there we go! That gives you a total return of just over seven percent on your money.

Took me a few times to say that. I can't believe I memorized that! I don't use a teleprompter for any of this; I memorize a lot of this stuff, and then I just say it back to the camera. So that was a win! But hold on there because wait, there's more! It gets even better because that seven percent is just your cash on cash return.

There is also the return on equity portion of this entire calculation because remember that every single month that you pay your mortgage, part of that payment is the interest that you owe on the balance of your loan; the other part is the equity, the amount of principal you are paying down every single month. So every month that goes by that you're paying a mortgage is one month closer to you owning 100% of that property.

So in order to calculate how much equity you're actually paying down, let's go back to our website mortgagecalculator.org. By the way, this is not sponsored by them. I wish they were sponsoring this video because I need some Lambo money! But anyway, it's just a website I really like, and basically, this is the website that I use myself.

So anyway, once you input all of your numbers, you're going to go to underneath where it says calculate, where it says see amortization schedule. Then you're going to click show annual amortization, and then hit calculate. Also, hit that like button!

And there we go! We can see that in the first year you pay down your total loan balance by four thousand two hundred and forty-nine dollars. And remember, this is straight-up equity in the property, so I absolutely count this as income as part of your total return.

So now we go back into the lovely chart here that took me forever to do. So now we take our four thousand two hundred and forty-nine dollars in equity the first year by paying down the mortgage, then we add, in addition to that, the five thousand three hundred and twenty-eight dollars cash return that you get from your rents—again, after all the expenses and after paying the mortgage.

That brings the total ROI on this property to nine thousand five hundred and seventy-seven dollars in the first year. And then, of course, if we do the normal calculation, take that number, divide it by seventy-five thousand six hundred, and multiply by a hundred—again, that gives us a twelve point six percent return just the first year.

That's basically a very steady, predictable, guaranteed twelve point six percent return. This is why I absolutely love real estate. With this entire formula, you can pretty much just go and plug in your own numbers, and that is going to give you the expected return of the property.

I also use this calculation to determine how much a property is actually worth. For example, I can compare the expected return of one property against everything else that's selling on the market, and then based off that, I can tell whether or not it's priced in line with everything else or if it's overpriced or if it's actually underpriced.

I also use this calculation to determine how much I'm going to be making from my investments, especially when you begin renovating properties, raising rents, and adding value to the properties. This is where these rent numbers really take off.

If you're ever thinking about getting in and investing in real estate, this is the most important thing that you will need to know how to do. And just for practice, I recommend that you go online, check out a few properties, figure out approximately how much you think they would rent for, and then plug in your own numbers.

If you do this example, and if you plug in your own examples here ten times, I guarantee that after ten times, you will fully understand—you’ll fully know how to do this, and this is going to help make you a ton of money in the future.

So with that said, you guys, thank you so much for watching! I really, really appreciate it. Again, if you enjoy videos like this and you're not already subscribed, make sure to smash that subscribe button, smash that notification bell! Also, again, if you really appreciate videos like this, just go ahead and add me on Instagram. I post it pretty much daily, so if you want to be a part of it there, feel free to add me there.

Finally, I also have a private Facebook group in the description for anyone who's interested in real estate, real estate investing, real estate agents, real estate wholesaling—real estate in anything. The link to that is in the description. Feel free to add yourself to that; I think we have to narrow like thirteen thousand members in that group, which is awesome! So it's such a cool community.

So anyway, add yourself to that. Thank you again for watching, and until next time!