An Example Of Where There Is Negative Cash Flow Quick And Easy Formula For Success In Property Development

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Quick And Easy Formula For Success In Property Development

Here are some quick and easy formulas for finding your break-even point:

1. Calculate your potential gross income.

Potential gross income is defined as the highest income that can be earned when the property is 100% occupied. For example:

Your potential gross income for renting 10 apartments at $350.00 per week each is:

10 units X $350.00 p/week = $14,000 p/month

$14,000 X 12 months = $168,000 p/yr.

2. Calculate your total operating expenses.

Add up all your monthly expenses, including taxes, insurance, maintenance, repairs, utilities, landscaping, accounting, management fees (if applicable), salaries, etc. Then multiply that number by 12 to get your annual total.

3. Calculate your total mortgage payment for 12 months.

This is called your annual loan service. You can use this formula to find your break-even point.

Break-even occupancy % point = (operating expenses + annual debt service) ÷ potential gross revenue X 100.

Here’s a quick example for you.

The building is 50% occupied. At 100% occupancy the building brings in $168,000 and operating expenses run at $60,000. Annual debt service of $46,000 is:

Break-Even Occupancy % Point:

($60,000 + $46,000) ÷ $168,000 X 100 = 63%

This means that when the asset reaches approximately 63% occupancy, it breaks even. Below 63% the property will operate in negative cash flow and above 63% occupancy, the property will have a positive cash flow situation. Given this number you need to ask yourself these questions:

1. How long will it take to reach 63% occupancy?

2. Can I finance the property till 63% occupancy?

Some of the questions that come to mind regarding real estate are:

1. How much will increase?

2. How long will it take?

Here is a more fundamental problem:

What causes property value to increase?

In general, revenue, in particular Net Revenue (After operating expenses), income drives the value of the property. The basic takeaway here is that real estate investors actually buy the property’s income stream. If you have more income streams for sales, you can expect to get more for it. The faster and more your income grows, the more likely it is that the property will appreciate in value.

Real estate prices will depend on supply and demand and not necessarily at the pace of inflation. Prices have been known to double in a few years and then do nothing for a few years. The better the location of the property, the higher the demand. However, you will probably pay more for it, because the more expensive the property, the lower the yield.

If you are concerned about losing employment, you should check out income replacement insurance and disability insurance. This will help you sleep better at night.

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