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How to Tell If a Rental Deal Is Actually Worth It

 Somebody sends you a listing. Three bedrooms, one bath, needs some work. Asking price is $95,000. The rent comps in the area say $1,100 a month. Your first instinct is to do the quick math — that's over a one percent ratio, so it must be a deal. Maybe. Maybe not. The one percent rule is a starting point, not a finish line. To know whether a rental deal is actually worth your money, you have to run deeper numbers. Here's how to do that without a spreadsheet that looks like it was built by NASA. Start With the All-In Cost Purchase price is not the same as total investment. If the property needs $15,000 in rehab, your all-in cost is $110,000. Add closing costs — assume three to four percent of purchase price if you're financing, so another $3,000 to $4,000. Now you're at $113,000 to $114,000 before a single tenant walks through the door. This is the number that matters for your return calculations. Not the listing price. Not the contract price. The total amount of money y...
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Why Your Rental Property Cash Flow Is Lower Than You Think

  Why Your Rental Property Cash Flow Is Lower Than You Think Almost every new landlord overestimates their cash flow. Not by a little — by a lot. They look at the rent, subtract the mortgage payment, and call the difference profit. Then six months in, they're wondering where all the money went. The gap between expected cash flow and actual cash flow comes down to the expenses nobody told them about and the ones they knew about but underestimated. Here's where the money really goes. Vacancy Isn't Zero The most optimistic assumption in any rental pro forma is zero vacancy. It's also the most unrealistic. Even the best landlords in the best markets experience tenant turnover. A tenant gives notice, you spend a week turning the unit, two more weeks marketing it, another week processing applications. That's a month of lost rent minimum. Budget for at least one month of vacancy per year on every unit. In markets with seasonal demand or higher turnover, budget for six to e...
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The 5 Numbers Every Landlord Should Know Before Buying a Rental

 Most landlords buy their first rental property based on two numbers — the purchase price and the expected rent. If the rent covers the mortgage, they call it a deal. That's not analysis. That's hope with a down payment. Real deal analysis requires more than two numbers. It requires understanding the full financial picture of what a property will actually cost to own and what it will actually produce over time. Here are the five numbers that matter most. 1. Net Operating Income Net operating income is what the property earns after all operating expenses but before debt service. Take your gross rental income, subtract vacancy loss, and subtract every operating expense — property taxes, insurance, maintenance, property management, utilities you cover, and any HOA fees. What's left is your NOI. This number tells you what the property actually produces as a business, independent of how you finance it. A property with strong NOI can support more leverage. A property with thin NO...
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