Making Residual Income through Rental
The two attractive features of rental investment are: the ability to make money off
the rental income, and the likelihood that the property value will increase over
First, you will need to find income-generating property. Income-generating
means that it has a positive cash flow. You cannot determine if a property has a
positive cash flow simply by asking the seller, because you might not get the
whole truth. The best way to garner this information is by requesting the past 5
years worth of bank records and expenses from the seller. If they can’t pull them
together or aren’t willing to share them with you, get out of the deal.
If you do get the financial records, add up the income per year to get the net
income. Add together the expenses per year to get the property’s net operating
expenses. Subtract the expenses from the income and you have the property’s
net operating income. Find the debt service fees, and subtract them from the net
operating income to get the property’s cash flow.
Here is an example
Susan finds a great property in a prime urban location in the District of Columbia.
It’s a condo that is 300 square feet and selling for $100,000. A steal by city
Susan had a 20% deposit, and got a mortgage for the remaining $79,200. She
did not get Personal Mortgage Insurance (PMI) because she had more than 20%
down. The debt service costs her an annual amount of $6,403. During the first
year of her rental, she earned $1,107 (a 4.5% profit). During the second year,
she didn’t have to pay the closing costs, so she brought in $5,683 (a 22.9%
profit). As time went by, Susan increased the rent and she went for 25.3% profit
in the third year to a 30.6% profit in the fifth year. Her five year average, pre-tax,
was an impressive 22.2%.
If you multiply this example by, say ten different situations, you would have a
positive cash flow of over $75,000 per year. If you prefer to not take care of the
ten properties yourself, you can hire a maitainence man for $30,000 and still take
in $45,000 without the headaches!
Finding the rental properties before they become public knowledge is important
for getting a good deal that will make you rental income. Network with area
CPAs, lawyers, real estate agents, financing companies, etc. to get the insider
information on properties that might be coming onto the market.
Feel free to leave questions and comments!
Nancy Geils, Owner
Investing with the Stars
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