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Rental Property Operating Expenses and Cash Flow

Don't Go Cash Flow Negative Because You Misunderstood Operating Expenses


I received a RSS news feed today from a discussion in a real estate investment forum. A new investor was confused by what is actually included in "operating expenses" for a rental property. Obviously, as with any operating business, we will have income and expenses. One must be careful to understand what is normally included in operating expenses for a rental property.

Actually, the part that bites some new investors is what is NOT included...the mortgage. And, since a monthly payment is necessary in non-cash purchases, the "debt service" as it is called, is a major component of cash flow, positive or negative. The goal of successful real estate investment is a positive cash flow, while also realizing the other benefits of real property ownership and investment. These include appreciation in value, tax breaks and other benefits.

However, when you're evaluating possible rental property purchases, and you see a figure in the financials for operating expenses, there isn't any mortgage payment in that number. You'll not only have to pay those expenses, but also your principal and interest payments as well. So, be sure to analyze the "cash flow" of the investment with great care.

Take this link for a very useful downloadable spreadsheet, as well as explanations of ten or so of the most important calculations used in real estate investing. Happy investing!

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