Whatever your strategy, you’re going to want to crunch your numbers before you jump in. It’s as simple as pinpointing what rental income you can reasonably expect and figuring out what your costs will be to generate that income.
When your rental income exceeds your expenses, your property is “cash flow positive.” Here’s an example: If your monthly rent is $1,800 and your costs total $1,500, your property is $300 cash flow positive.
When figuring out your rental property costs, you’ll want to include:
- Property taxes
- HOA or condo fees
- Utilities not paid by the tenant, maintenance
- Vacancy (typically two times the amount of the monthly rent, assuming it might take you two months to replace a tenant who departs)
- Licensing and inspection fees
There may be other line item costs depending on where the property is located. In Baltimore, many properties are assessed ground rent each year, for example. The important thing is to make sure you include in your calculations all the costs you will incur.
In addition to these hard costs, you need a financial cushion. I call this line item my “It’s Gonna Break” fund. The water heater might be only five years old, but it could still go out and you’d need to replace it quickly so your tenants have hot water. So out of each month’s rent, you squirrel away savings that will be used when a major item needs repairing or replacing.