Over the past 16 years, I’ve worked with nearly 200 first-time investors. From my experience, until they go through our training, most are completely focused on ROI and cash flow.
Here are some key points new investors must keep in mind:
1. You Are Not Buying Real Estate
Yes, the result will be purchasing a property, but that is not what you are buying. You are buying an income stream. You are buying a method of permanently getting off the daily work treadmill and living on your terms. So what matters is not the property itself; it is the income the property produces.
The net rental income is called cash flow. The formula is:
- Cash flow = Income – expenses
To make money, your income must be greater than your expenses. I will focus on income (or rent) here.
2. Probable, Not Gross, Income Is What Matters
Many people calculate annual income as 12 times the monthly rent. If a performing tenant always occupied the property, this would be true.
However, reality is far different. A more realistic view of annual income is:
- Annual income = 12 x monthly rent – vacancy cost – expenses
I will ignore expenses and only focus on vacancy costs.
There is no way to know precisely your future vacancy costs. However, you can estimate the average future vacancy costs based on the tenant segment your property attracts and their historical behaviors. You can obtain such historical information by interviewing property managers.
I will use my tenant segment research in Las Vegas to show you how to estimate vacancy costs.
Las Vegas has three primary tenant segments: transient, permanent, and…