Real estate offers a lucrative investment opportunity for building a comfortable nest egg, assuming you keep an eye on the numbers. Although real estate potentially offers the benefit of appreciation, positive cash flow is what keeps you afloat with a supplemental source of income. Conceptually, cash flow is an easy calculation of money in minus money out, which is an effective way to see how much money you've made. However, if you're trying to predict your future cash flows, you'll want an average that takes into account slow times when you might not have a paying tenant.
Multiply the monthly rent received from a property by 12 to calculate the property's annual income. As an example, if you rent out a condo for $1,000 per month, multiply $1,000 times 12 to calculate $12,000 in annual income.
Multiply this total by the anticipated occupancy rate, which is the percentage of the year the rental property is actually rented. This rate can be calculated using previous years' rentals or estimated by similar rentals in your area. In the example, if the property is not rented for one month out of the year, that leaves 11 months when it is rented. Divide 11 by 12 to calculate an occupancy rate of 0.92. Multiply 0.92 by $12,000 to calculate the adjusted annual income of $11,040.
Add any additional annual income to the total. In the example, if you also rented a parking space for $600 per year, add $600 to $11,040 to calculate a total annual income of $11,640.
Add the monthly fees you pay for the rental property and multiply by 12 to calculate the annual expense. In the example, if you pay a $600 monthly mortgage, a $100 monthly regime and have average maintenance fees of $50 per month, add each figure together to get $750 and multiply by 12 to calculate the annual expense of $9,000.
Add any annual fees to this figure to calculate your total annual expense. If you pay $1,000 per year for the condo's taxes, add $1,000 to $9,000 to calculate your total annual expense of $10,000. Be careful not to add payments twice; annual taxes and insurance are often included in your mortgage payment. If that's the case, you do not need to add them to the annual total.
Subtract the total annual expense from the total annual income to calculate your annual cash flow. In the example, $11,640 minus $10,000 represents an annual cash flow of $1,640. If the total is above zero, it's considered positive cash flow. A figure less than zero represents negative cash flow.
Divide the annual cash flow by 12 to calculate the average monthly cash flow. Continuing with the example, $1,640 divided by 12 yields expected monthly cash flow of $137.
- To calculate your annual return on investment, divide the annual cash flow by the amount initially invested. In the example, if you paid $10,000 for the down payment and closing fees, divide $1,640 by $10,000 to calculate your annual return of 0.164, or 16.4 percent.
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