How much should your rental income be? If you’re a dreamer, you’d say millions and millions. If you’re one of those real estate skeptics, you might say “not enough”.
Realistically, your rental income will differ depending on numerous factors, but overall you should be making enough rental income that makes you live comfortably. Generating lots of money from real estate requires lots of time and effort in the beginning. Here’s a snapshot of how much rental income you can be making.
Cash Flow Matters
First lesson in earning rental income: cash flow matters. Instead of relying on appreciation, focus on purchasing a property that generates positive cash flow.
Related Article: 5 Ways To Create A Positive Cash Flow Income Property
In fact this is quite crucial when it comes to earning money from rental income. The issue with relying on appreciation is that you can never guarantee an increase in prices. It’s a generous bonus if it does, but don’t depend on it! You might end up paying for your property years and years before it pays you back. Are you willing to wait? Probably not.
So, focus on generating a positive cash flow. With that being said, earning a decent rental income does not mean that you are earning a positive cash flow. You have to calculate the property’s expenses into account–there’s mortgage payments, repairs, and perhaps you’re paying a property manager, etc.
Related Article: How To Do Investment Property Analysis
Bonus tip: Always be conservative in your cash flow estimate. Use Mashvisor to get a projection of cash flow.
Make sure you plan for the worst case scenario and have you prepared for any unexpected costs. It’s always better to end up making more money than you think, rather than less. For instance, plan a few hundred dollars extra for repairs needed. And make sure you plan for a some vacant months. You never know when you won’t have tenants. Maybe, you’ll get lucky and this won’t happen. But, again, it’s always good to avoid bad surprises!
Another bonus tip: Choose the right property.
Get an inspection before buying the property. Don’t make the common mistake of waiving the home inspection when the market is hot and buyers are eager to obtain property.
To make sure you’re buying the right property, try finding properties that are below market value. Also make sure you study its neighborhood real estate market thoroughly. You might have to go through many markets and houses before you find “the one.” But, it’ll be worth it.
Search a neighborhood on Mashvisor to get its average traditional and Airbnb rental income, cash flow, and cash on cash return, among other needed calculations. This will help reduce your search time tremendously.
The 2% Rule
You may have heard of this rule or guideline before. It really helps you in assessing whether you are purchasing the right property or not. It basically suggests that for a property to be a “good” investment, the rent should be higher (or at least equal to) 2% of the purchase price. For instance, let’s say that you purchased a property for $100,000, the rents needs to be at least $2000 or higher per month.
There’s a variation to this 2% rule–the 1% rule. It’s the same, but instead of meeting the higher 2%, rental income can only be 1% or higher. So, for that $100,000, rent can be $1000 or more per month.
While both rules have been accounted for among real estate investors, it’s important to remember this rule cannot always be followed, especially with higher-priced homes. In locations with more expensive homes, the rental rates are higher anyways but will not meet the 1% 2% rule. Positive cash flow is still feasible and investors are able to benefit from faster home appreciation rates.
How Should You Spend Your Rental Income?
Now that you have an idea on how much rental income you should be making, how should you spend it? There are many different ways you can spend it, and I can’t tell you which one you should go for. It all depends on your goals and financial assets.
Related Article: 6 Better Ways To Spend Rental Income
Some real estate investors choose to use that money to begin purchasing new properties. Others choose to use their rental income to start paying off one property at a time. Whereas, if you are short on cash and/or financial assets, then it might make more sense for you to save your rental income.
The Bottom Line…
You won’t be rich from real estate in one night, but you shouldn’t just be breaking even. That is why it is crucial to purchase a property with a positive cash flow. You should be earning from your rental income even after you subtract all of your expenses.
Mashvisor is a great tool to get started. Check out it now and begin your easy real estate analysis.