In today’s episode we discuss the importance of understanding and calculating a properties cash-flow and rates of return. Specifically we look at capitalization rates, cash-on-cash returns, and the total return on investment (ROI).

A good understanding of these numbers are required to make smart investment decisions and to be able to properly compare one investment to another.

We also take a look at a real world example available today from www.NoradaRealEstate.com.

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Cash-Flow and Rates of Return
Welcome back to Passive Real Estate Investing. I'm your host, Marco Santarelli. This is the show where busy people learn how to build substantial passive income and create wealth for the long term. If this is your first time here, welcome. We're glad to have you. If you're returning, welcome back.

Today's show is about cash flow and rates of return. This is something that every investor needs to know. It's important to know how your properties performing for you. Or if you're analyzing a property because you're looking to purchase, then it's important that you know how to analyze that property to know what the rates of return are and to be able to compare property to other investment options that you have. This is a very important topic today. I'm going to break this down into two main sections, cash flow and then rates of return. Both are equally important because the rates of return come from the cash flow of that property.

Income is the gross rental income that comes from a property.

Let's begin by talking about cash flow. Cash flow is loosely defined as the income from a property that's left over after all expenses and bills are paid. That's a simplistic definition and it's not exactly correct. Let's break it down. Income is obvious, it's the gross rental income that comes from a property. If you have a property and it rents for $1,000 a month, that is your gross rental income. Now, assuming that comes in every month, that will be what is collected by you or your property manager and from there, you would deduct expenses.

Sometimes you'll have other income coming in from a property. It's not that common but it is possible to have late fees from tenants who miss a payment or are late on their payment because rents are generally due on the first and late on the fifth. There may be a $50 or more late payment fee that will be charged and that's added income for you. Not all that common, but on larger properties and sometimes on fourplexes, you'll have income from a washer and dryer. For the most part, the income is made up of the gross rental income from that property.

When it comes to expenses, there's a long list of potential expenses but there are few that you can't get around. The largest expense you typically have will be property taxes. Property taxes will vary from state to state, county to county. They're usually the highest expense and you can't get around them. Property taxes will vary from about one percent to as high as five percent. Texas, for example, will average somewhere around 2.2%.

At the end of the day, property taxes are a mandatory expense that you will have.

At the end of the day, property taxes are a mandatory expense that you will have. Some people are under the false belief that if you invest in a state or a market where property taxes are high, that may not be a good deal or it should be avoided because it cuts into your cash flow. That's not true because taxes are relative to the income.

In most cases, again I use Texas as an example, you will find that even though you have higher property taxes relatively speaking, you also have higher income or rent. That income that your tenant is paying is going to make up for those highe...