Surprise! You're a Landlord by John A. Yoegel

Surprise! You're a Landlord by John A. Yoegel

Author:John A. Yoegel
Language: eng
Format: epub
Tags: ebook, book
Publisher: Adams Business, an imprint of Adams Media, Inc.
Published: 2009-07-15T00:00:00+00:00

Net Operating Income / Cash Flow

At this point, you can total your expenses and subtract the total from the Effective Gross Income. The result is the Net Operating Income. Next, subtract your total annual mortgage payment and what you have left is what is referred to as Cash Flow. Remember that you have already subtracted real estate taxes and insurance so the only thing you need to subtract here is the mortgage payment itself. There are three possible outcomes of this calculation:

Positive cash flow—All your expenses are covered and you have money left.

Zero cash flow—You take away no money but all your expenses are covered.

Negative cash flow—Not all of your expenses are covered by the rent.

Obviously you’re hoping that renting the house will cover all expenses. And if you’re fortunate you might take away a little cash each month, too. But even if you are in a negative cash flow situation, remember that you would have to pay all the expenses on the house out of your pocket if it were not rented.

There are two notes of caution regarding a negative cash flow situation. First, you cannot automatically assume that you can charge a higher rent to cover expenses. As pointed out in the section on the wrong way to set the rent, the market, not your expenses, will determine what you can charge for rent.

Second, if your negative cash flow is high enough, it may pay you to sell the house now for less than you want. This way you avoid generating more losses waiting to sell the house at a higher price. (See real estate math in Chapter 19.)


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