So how do you really calculate your rental property income? Friends, Kris
Krohn here limitless TV and that is what we're going to be talking about today.
Rental property income how do you calculate this? And I got to tell you
that there is a right way and there is a less right way. Ultimately, I want you to
know that in the accounting world, if there's one thing I've learned it's that
even though the IRS has stacks of rules on how to do accounting they're in some
ways are these acceptable ways but there's a lot of gray area. And so today,
I want to share with you what the number one mistake is that people will make but
first we got to hit the math right? Like, how do you, what do you really take into
account when you really want to know what is my rental property income? And so
when we're talking about a property there's a couple of different things
that you need to be aware of. We're gonna set this up as if it is a rental. Right?
We're not talking lease options or things like that I'll tell you a little
bit what that could look like. If you're doing a rental, you usually are collecting
first month's rent. You're collecting a deposit and sometimes part of that
deposit is non-refundable as a cleaning fee for when you leave to get in there.
So let's just say that it's $1,000 a month to be able to rent this house.
That's what my rent is. And let's just say that my deposit is also $1,000. So
I'm gonna put my first month spring down of a thousand. I'm gonna put my deposit
of a thousand. And let's just say that $300 of it is non-refundable. Here's what
that means, no matter what that 300 is mine. But a year later if they move out
and they keep the house in good clean condition the other $700 would go back
to them. Note that the standard as though is that a property management company or
use the landlord are gonna go in and you're gonna see wear and tear and
you're gonna say, you know I want to paint this room. You know, I want to have
the carpets cleaned. I want to do something beyond this and so it's very
normal often for people not to get their deposits back. Clean freaks? that exist,
are going to demand their deposit back if they've done a great job taking care
of the place and so that's a factor that you need to have. So when you're
calculating your, what is my real rental property income? The next piece of
information we need to know is, what is the mortgage? And let's just say for the
case of this example that the mortgage is $700 a month. Well I know that I'm
renting for a thousand, I know that my mortgage is 700, what's the difference?
That's three hundred dollars. So my cash flow is three hundred dollars. Now let's
do some basic math here. Let's just say that I rent this for an entire year and
I'm collecting, they're paying on time and I'm getting three hundred dollars,
twelve months. Well what is that? that's $3,600. That's what my rental
income looks like not my gross that's my take home cash flow. That's my profit. Now
by the way that's not what your profits gonna look like on paper cuz you gotta
write offs, you're gonna write off interest. In fact, this number often turns
to zero to the government but you actually put $3,600 in your pocket. This
is why people with, with leftover money looking for tax shelters they're buying
real estate because it just it works out in your favor the constitution was
written to favorite real estate investors. Now this $3,600 I'm gonna add
to it. Remember my non-refundable cleaning fee? Although I probably
wouldn't necessarily look at that as income because that money is really
either going back in their hands or it's being set aside to what? Clean the
property. So, no. I'm not really gonna look at that part but then we also have to
look at the fact that you might also then have a couple of expenses. For
example, are you hiring a property manager? Your property manager charging
ten percent of gross rent that they collect? Well what's ten percent of a
thousand dollars? That's a hundred dollars. That's a hundred a month. So
you've had twelve hundred dollars in expenses for property management which
really just took your thirty six hundred down to twenty four hundred.
And then if you don't have people that are reupping their lease for a second or third
or fourth year, then if every year there was change over you're often going to
experience in most markets one month of vacancy right? An 8% vacancy. So I'm gonna
lose them, I'm gonna lose a month which might be a $700 payment that I've got to
pay once. And this $2,400 now becomes what? It now becomes
$1,700. Now $1,700
and we're not taking into account the equity. We're not taking into account the
tax benefits and the tax advantages and some of that. We're just at this point
looking at calculating our rental income and what really the true income is. Now
we gotta ask our self, is this investment a good investment or not? This is a
little bonus you didn't ask for this I'm just gonna put it in there whether you
want it or not. Um if I bought this house if this house has a value of $100,000
and let's say I purchased it for $75,000, then the first thing that I know is I've
got $25,000 of equity. And when I bought it I put 20% down.
So what's 20% down on $75,000? It's 15 grand. That the closing cost got wrapped
in let's say that I had you know $5,000 a fix-up and repair on it cuz I got a
discount. I put up $20,000 to be able to buy this house and it produced $1700.
Well 1,700 is 9 or 8 percent of 20,000. Which means that my cash on cash return
was doing eight or nine percent on my money. Now I just want to ask you a
question, some of you were wondering like, well how
did you do that? You can do the math you can divide them into each other and
figure out what what was my effective return. Let's just call it 8%. Does your
401k producing 8%? Is the stock market producing 8%? Is the stock market giving
you $25,000 of equity? Is my bank account giving me 8%? No it's
giving you a half percent is giving me 1%. So in this deal, we're talking about
someone increasing their net worth $25,000 and based on what's left over
here, guess what? They're making 8 9 percent of their money. In real estate, at
the end of the day taking all your expenses into account, if you can step
into equity and if you can be making 8 to 10% minimally on your money then you
are easily and grossly outperforming the financial markets. And you know what this
is why most American millionaires made their first million in real estate. So
this is the first bit of information that I want to share with you about how
you about how you calculate this. In the next segment, what I want to do is I want
to talk about the one danger that if you do the math wrong it's gonna crush you.
So stay tuned. Now here's the number one danger zone that you need to be aware of
there's a difference between net and gross. A lot of people on paper will say,
this looks like a good deal look at the numbers. And the question is, are you
looking at the gross? For just a second imagine that you're making $1,000 of
rent every month for 12 months. 12,000 dollars of income! No you need to
subtract out the expenses like it just showed you. And then are you remembering
to subtract property management fees? Are you actually setting money aside for a
sleep well at night account for vacancies or unexpected repairs? You know
what we're doing now is we're moving within the realm of reals and reality as
opposed to on paper everything looks good. You know there's a lot of investors
that will get in on a deal thinking that hey this is amazing this looks good on
paper it's perfect. Look at the ROI and then in hindsight, six months passes two
years passes you are like, all this deal kind of stinks and the reality is deals are
gonna go that way so if you want to make sure you're living within reality make
sure you're always looking at net numbers instead of gross numbers. Ask on
every investment. Are there any other possible expenses? any whatsoever? any at
all? And what it's going to reveal for you is ultimately subtracting out
everything to get you to reality of what you can really make on the deal. Thanks
for joining me today. Click the bottom link below if you want to learn more
our next three day real estate training event where we can take all this
information and systematize it so that you can start your world of real estate
investing right now.