Investing in real estate can be profitable, but success depends on understanding your investment property’s financial performance. Two key metrics to analyze are cash flow and return on investment (ROI). Here’s how to calculate them.
Step 1: Calculating Cash Flow
Cash flow is the money left after all expenses are paid. A positive cash flow means your investment property is making money each month.
Formula:📌 Cash Flow = Total Rental Income - Total Expenses
Example:
Monthly Rent: $2,000
Mortgage: $1,000
Property Taxes & Insurance: $300
Maintenance & Vacancy Reserve: $200
Property Management: $150
Total Expenses: $1,650Cash Flow: $2,000 - $1,650 = $350 per month
A positive cash flow means your property is generating passive income each month!
Step 2: Calculating ROI
ROI measures how much profit you're making compared to your initial investment.
Formula:📌 ROI = (Annual Cash Flow ÷ Total Investment) × 100
Example:
Annual Cash Flow: $350 × 12 = $4,200
Total Investment (Down Payment + Closing Costs + Repairs): $50,000
ROI: ($4,200 ÷ $50,000) × 100 = 8.4%
A higher ROI means a better return on your investment property.
Final Thoughts on Investment Property Profitability
Understanding cash flow and ROI helps you make smart real estate decisions. Always run the numbers before purchasing an investment property to ensure it’s a profitable deal!
🔹 Pro Tip: Aim for a high ROI and positive cash flow to maximize your investment returns.
The information in this article are of the opinion and experience of the author. Due diligence should always be done before investing in real estate.
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