How To Calculate Rental Income - Huge Mistake Most Investors Make

How do you calculate your rental property income? There is a lot of grey area, and some mistakes that people make. So let's first look at all the factors of calculating rental property income, and then discuss the biggest mistake most investors make.

Cash Flow and Equity are why we are doing real estate. This topic is a must for success in real estate.

Watch and Enjoy!
Kris Krohn & Nate Woodbury

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Video by Nate Woodbury (The Hero Maker)

[tahirisaid]

Investing your life savings in a rental property without certainty of returns can be risky. It's crucial to thoroughly evaluate the investment potential before diving in. I've learned that making wise investments is key to building wealth. It's not just about investing money; it's about investing smartly to secure a prosperous future. Here's to making informed decisions and achieving financial success!

[omaraziz]

Forgot to add repair costs, insurance, and property taxes. 3 major costs that eat into your returns.

Rule of thumb says that 1 percent of the purchase price per year, should be set aside for maintenance and repair costs. In this instance, $1000. Divide that by 12 = ~ $80 a month.

Assume 1% for insurance every year = ~$80 a month

Assume ~1% for property tax = ~$80 a month

That’s $240 a month x 12 = $2880. Minus that from the annual returns in the video ($1700 per year) and we’re looking at a cash flow negative property here by $1180 a year.

Now, none of these numbers are 100% accurate but it’s important to calculate everything into the equation before making a purchase. Food for thought!

[Calendyr]

So... no insurrance, taxes, repair fees, CapExp, electricity, gas, etc? Man your expenses are really low!

[AA-lgye]

The fact that some of the biggest expenses were left out makes me question alot of what's said

[billverster]

What about other costs like property taxes, HOA, capital expenditure provision etc

[msaleciavaz]

Yuh this guy is the real deal!!! I’ve learned a lot from you!!

[shinwonmoon]

What about insurance and property tax? Can't forget the T and I in PITI. I personally try to look for 12% annual cash on cash ROI as a typical Vanguard index fund that tracks the S&P500 averages 8% returns.

[MrSethmo]

After I left my last comment, below, I really started thinking about the numbers. I think when you do your calculations in terms of "net", it really confuses things. I think the better approach is to calculate the expenses annually. $1000 a month rent times 12 months is $12, 000 annually. But with one month of vacancy, your annual income is reduced to $11, 000. Regardless of the vacancy, you still have to pay $700 a month for the mortgage. That adds up to $8, 400 annually. $11, 000 -$8, 400 leaves $2, 600. Now you would subtract the $1200 a year in property management fees. But, because, you were vacant for a month, the annual property management fees are really $1, 100. That reduces your annual income down to $1, 500. Note that this figure ignores property taxes, homeowners insurance, and any repairs that have to be made to the property throughout the year. So now the figure is actually a little worse than the $1, 700 annual income that you calculated in the video. And to be clear, this is calculating cash flow, not taxable income. If we were calculating taxable income, we wouldn't be taking the $700 mortgage into consideration. We would only be taking into consideration that portion of the $700 mortgage which relates to interest (and property taxes and homeowners insurance, if it is escrowed). Sorry to be so anal about this, but I was mistaken in my earlier comment and I wanted to correct the record.

[JPWick]

Also, I like the fact that he used "systematize" over "systemize." Very subtle, but appreciated.

[jayknight]

The way the expenses were broken down makes it easy to understand and apply to my potential investments.

[supermantohero]

Dont forget about property taxes. Property taxes put a dent in your net profit as well.

[zk]

Nobody ever talks closing costs for getting the property. Include that in your calculations if you really want to be realistic, especially in the first years. That's not equity...that's all the fees associated with the transaction. Likely at least $5k on a $100k mortgage

[ankiss]

I got 22% rate of return in my vanguard mutual fund last year. Market can do better than 8%

[brady]

Dude this video was amazing. Thank you! Closing in three days on our first rental!!!!

[Sadjina]

Kris, I love your content, but this is grossly misleading. What about:
- maintenance & repairs
- big expenses like roofs and water heaters (I know you like to pass the property on before major repair costs are immanent, but not accounting for it at all seems a tad optimistic)
- insurance
- property tax
- fees like sewer, water, garbage etc
- and, finally tax on what is left?

[JPWick]

"The constitution was written to favor real estate investors." That jumped out to me. Can you expand on what you meant by that?

[michaelgarcia]

How do you decide what you should charge for rent?

[jasonzrs]

What about the tax is the tax after mortgage

[johnyracercat]

I guess the toilets never going to clog, a/c won't break, water heater, disposal and the carpet will last forever. ;-)

[IlyaShulyak]

Some people have a point what about the property taxes and insurance... also your net number wouldn’t be $1, 700.00 it would be $1, 400.00 because if you have one month vacancy like you said in your example you would have to take away the full months of rent -$700.00 for the mortgage and and -$300.00 for rent you didn’t collect that month. Other than that thx for the video and trying to teach people what you do?