((Cash Flow x # of Units) + Expenses (Taxes, Ins., W/S/G))/.85 (Vacancy+Maint) + Mortgage (Principal + Interest) = Total Gross Rents
Using the above formula, you can calculate what total rents SHOULD be to hit a desired cash flow/unit on any given property.
Let me run you through an example:
Let’s say there’s a duplex for sale for 150,000. I usually work from my DESIRED CASH FLOW per unit, which is $300/month, and that tells me how much gross rents should be. Let’s also say you can buy the property using a 25% down loan. You will need to do some due diligence on utilities, taxes, insurance, and a mortgage at 120,000 (75% of 150,000). Here’s the math:
((300 x 2) + Expenses (125(taxes), 83.33 (ins), 50 (lawn), 160 (w/s/g))/.85 (Vacancy + Maintenance) + 590 (Principal + Interest, 4.25% over 30) = Total (Required) Monthly Gross Rents
Running that calculation on the hypothetical duplex at 150,000, the gross monthly rents would need to be $1,788.04 to be able to CASH FLOW $300/month/unit.
That’s $600/month in profit to fund: a) future investments, b) vacations, c) your housing costs, d) whatever else you want.
Just to run the analysis one step deeper – looking at this deal, you will cashflow 600/month OR 7200/year. You paid 30,000 down, plus some closing costs. Let’s say you have a total of 33,000 cash into the deal. That’s a 22% return on investment NOT including debt paydown (that mortgage the tenants are paying for you) or appreciation. And it’s mostly tax-free money due to write-offs like depreciation.