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Recently, I have come upon numerous amazing apartment deals all over the US with incredible cash flow and benefits. Way more than last year or even the year before! I questioned “why?”, and found the answer to be fairly simple. Several investors, who purchased these apartment investments, did not see to the necessities to guarantee the success of their investment. I was astonished that the sole most significant thing they didn’t comprehend is calculating cash flow. Isn’t that apparent? Well, maybe to you and me, it is. As for them, my guess is that they were too overeager and sought to be “an investor”. Thus, skipping over the important step of seeking an advisor to aid them. The simple understanding of calculating cash flow is a completely essential skill. You cannot succeed without it. . You just can’t! I realize I am getting enthusiastic, but the typical investor, I found, does not have this basic skill. You need the fundamentals to be prosperous in anything. I advise to not use a spreadsheet when you first begin investing. I really do. Spreadsheets cause you to lose focus on the property. Calculating on a single sheet of paper first, makes the numbers you are computing truly mean something. You should never skip over the basics. Never.
I’m presently assisting 3 investors improve their distressed apartment building. I found a mutual reason and source for their demise. The first reason is that they made a bad investment most likely because of calculating the cash flow incorrectly. This is not brain surgery. In actuality, it’s fairly easy, but it is often disregarded even though it’s a no-brainer. Once you discover an apartment deal to assess, you’ll want to find the answer to the most significant question fairly fast:
Does the property make money every month?
In assessing any apartment deal (or any other income-producing property), there are 3 golden rules of “number-crunching” that you need to know about.
3 Golden Rules of Number Computing
Step 1: get the income per year
Step 2: get the expenses per year
Step 3: get the debt service per year
This is all you need in the beginning to assess any apartment deal!!
After you do this, the final part is easy subtraction: Step 1 amount minus Step 2 amount minus Step 3 amount = Cash flow per year
Step 1 is to find out what the overall rent payments are each month for every unit. Add it all up and then find the yearly amount by multiplying by 12.
Step 2 is to calculate what the functioning expenses are on a month by month basis. The functioning expenses do not comprise of mortgage payments or interest, but do consist of typical bills like taxes, insurance, utilities, repairs and upkeep, property management fee, wages, admin costs, publicity, and supplies.
Step 3 is to calculate what the mortgage would be every month if you purchased the property and then multiply that sum by 12 to get a yearly mortgage total.
You see? It’s easy as pie, right? Be familiar with how to do this before you start using a spreadsheet of any sort. Steps 1, 2, and 3 should be deep-rooted into your brain. If you depend on spreadsheets early on, you’ll lose focus on how the property really performs. Too many have lost focus on their apartment investments and lost their cash flow. Don’t let this happen to you. Go back to the fundamentals and build from there.
