How is a rental’s cash flow worked out?
Start with the rent, set some aside for the months the place sits empty, take off the running costs, then the mortgage. What is left is cash flow.
On the sample house, $2,750 of rent becomes $2,613 after allowing 5% for empty months. Running costs take $862: property tax, insurance, 5% of the rent for repairs, 5% for big replacements like the roof and the furnace, and 8% for management. That leaves $1,751 before the loan. The mortgage on $200,000 at 7% over 30 years takes $1,331, so $420 a month is left.
When does DealLevel say a rental works?
Every property gets one of three answers, from the same three tests.
- This deal works when it makes money every month, the cash you put in earns at least 8% a year, and the rent covers the mortgage at least 1.25 times after running costs.
- Cutting it close when it makes money but misses one of those bars, so there is little room for a bad month.
- This deal doesn’t work when it loses money every month.
The sample clears all three: $420 a month, 8.8% a year on $57,500 of cash in, and the rent covers the mortgage 1.32 times.
What would make it stop working?
Every answer names the one number most likely to turn the deal into a loss, and where that happens. For the sample house it is the interest rate: at 7% it makes $420 a month, and above 9.97% it loses money. That is the number to check with a lender before you make an offer.
Which numbers make a rental look better than it is?
- Leaving out empty months. Tenants move out, and the weeks between them earn nothing.
- Counting only the repairs you can see. Roofs, water heaters and appliances wear out on a schedule, so the calculator sets part of every month’s rent aside for them. How much to set aside.
- Leaving out management because you’ll do it yourself. Your time is a cost, and the day you hire someone it becomes a bill.
- Forgetting closing costs in the cash you need. On the sample, closing adds $7,500 to the $50,000 down payment. What a rental really takes in cash.