If you’re thinking about investing in a rental property, you might be weighing the costs and potential income. If so, you’re probably wondering: “How much cash flow do you need for a rental to make sense in Florida?” This is a great question, because without knowing how much cash flow do you need for a rental property, you can’t make a decision on which property to buy and what would be the a good real estate investment to buy and what would be the outcome in the future for that investment, The answer here might surprise you…
Are you a homeowner with a property that is costly to maintain and needs repairs? Investing in a rental property may be the perfect solution for your financial woes. But before you dive headfirst into the market, it’s essential to determine how much cash flow you need to make the investment worthwhile. In this blog post, we’ll explore how much cash flow you need for a rental to make sense in Florida and help you get started on your property investment journey.
Cash flow. It’s the reason why most real estate investors acquire rental property! So perhaps you’re wondering how much cash flow do you need for a rental property to make sense in Florida – GREAT question.
The answer is challenging to give (because the number is different for everyone) but here a few ways to figure it out for yourself…
How Much Cash Flow Do You Need For A Rental To Make Sense In Florida?
Many investors want to start out of the gate with a highly profitable cash flowing property, but that’s not always the case. Millionaire cash flow real estate expert Robert Kiyosaki’s first real estate investment was just $25 cash flow positive each month! Today, Kiyosaki is very successful and wealthy.
So the first thing you need to do is make sure your expectations are realistic.
Instead of focusing on a single large cash flow amount each month, think of it this way: at the end of the month will you have less money left over, will you have exactly the same amount, or will you be profitable?
What’s interesting is: all of these are viable options…
Cash flow negative
This is when your expenses are more than your cash flow. While some real estate investors want to avoid this scenario, it’s not that bad if the expenses-to-income is fairly close or if the expenses are more than cash flow for a short period of time. While you may not want to have a large cash flow negative scenario for years, it might make sense in the short term (especially if you are borrowing money to pay for the investment).
Cash flow equivalent
This is when your expenses are about equal to your income each month. If you’re cash flow negative, your goal should be to get to equivalence as quickly as possible. Achieving equivalence for the short term may mean you’re on way to profitability. However, if you maintain equivalence, you might be hoping for a profitable pay-off on the sale price of the house when you choose to sell.
Cash flow positive
This is when your expenses are less than the income you earn each month on your properties and it’s a great place to be. In the words of Kiyosaki (from his book Cash Flow Quadrant), he would be willing to buy real estate investments that were even $80 cash flow positive each month – and he’d be willing to buy as many of those as he could get his hands on. Fortunately, it’s not hard to reach this level… and beyond.
So, how much cash flow do you need for a rental to make sense in Florida? Probably less than you think! After all, Kiyosaki started with just $25 cash flow positive each month and there are some scenarios where even temporarily cash flow negative investments make sense.
What Are the Important Things You Need to Calculate For Your Florida Rental Property?
1- Calculate your net operating income (NOI)
To determine how much cash flow you need, you’ll need to calculate your net operating income (NOI). Your NOI is the amount of rental income you receive minus the operating expenses of the property, including property taxes, insurance, and maintenance costs. Once you’ve determined your NOI, you can evaluate whether this income can cover your mortgage payment and other expenses.
In Florida, the average monthly rent for a one-bedroom apartment is around $1,200, while the average two-bedroom apartment is around $1,500. By using these numbers as a guideline, you can determine how much you can charge for rent and calculate your NOI accordingly.
2- Consider your financing options
The type of financing you choose will also impact how much cash flow you need. If you have cash in hand and purchase the property outright, your cash flow requirements will be lower. However, if you finance your property through a mortgage, you’ll need to calculate your monthly mortgage payment, which will impact your overall cash flow requirements. Some lenders may require a 20% down payment, which can be costly upfront, but may lead to lower mortgage payments and overall cash flow requirements in the long run.
3- Account for vacancy rates
One of the biggest risks of investing in a rental property is the potential for vacancies. In Florida, the average vacancy rate for a rental property is around 6%. To account for vacancies, calculate your expected cash flow based on a 90% occupancy rate. In other words, assume that your property will be rented out for ten months of the year. This will help you determine how much cash flow you need to cover your expenses during the months when the property is vacant.
4- Know your break-even point
Another critical factor to consider when investing in a rental property is your break-even point. This is the point at which your property generates enough cash flow to cover all of your expenses and make a profit. As a general rule of thumb, if your break-even point is around five years, the investment may be worthwhile. However, if your break-even point is longer than five years, you may want to reconsider your investment strategy.
5- Work with a professional
Investing in a rental property is a significant financial decision, and it’s essential to work with a professional who can guide you through the process. A real estate agent or property manager can help you identify ideal properties in your target market, evaluate your cash flow requirements, and connect you with the right financing options. By leveraging the knowledge and experience of a professional, you can make informed decisions and increase your chances of success.
Conclusion:
Investing in a rental property can be a smart financial decision if you do your homework and evaluate your cash flow requirements. By calculating your net operating income, considering your financing options, accounting for vacancy rates, knowing your break-even point, and working with a professional, you can increase your chances of success and make the most of your investment. So go ahead and take the leap into Florida’s rental market – the potential rewards may be well worth the effort!