When purchasing an investment property, a real estate investor should always consider the potential negative cash flow for the subject property. The subject property is the property the investor wants to purchase. Negative cash flow represents the difference between the expected rent and the total ongoing monthly cash outlay for the property.
Determine the expected monthly rent from the subject property. For example, assume the expected rent from the property is $2,000 per month.
Determine the monthly PITI payment for the subject property. The PITI represents the monthly principal, interest, property tax and insurance payments for the property. For example, assume the monthly PITI payment for the property is $2,500 per month.
Subtract the monthly PITI payment from the expected monthly rent figure. Continuing the same example, $2,000 - $2,500 = $500. This figure represents the negative cash flow for the subject property.
- The break-even point for a subject property is the amount of rent you would charge such that your revenue after expenses would equal zero. Continuing the same example, $2,500 - $2,500 = $0. Therefore, the break-even point for the subject property is $2,500. On the other hand, purchasing a subject property with a higher expected monthly rent payment than expenses would result in a positive cash flow for the subject property.
- "Real Estate Principles"; Charles Floyd and Marcus Allen; 2002
- "Principles of Real Estate Finance"; Charles Long; 2010
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