Just because you can enter a deal doesn’t always mean you should. Instead, take time during your cash flow analysis of a certain property to ensure that you’re not making the wrong assumptions about how much money you’ll make or spend. Here are a few things to watch out for when you’re thinking about investing in a property:

Revenues

• Monthly Rent: This is often way too high and not realistic.
• Late Fees & Pet Fees: These are likely to happen, but they shouldn’t be part of your expected cash flow.
• Application Fees: You can budget for these, but you’ll probably receive them just once per year — ideally less than that, since you want to keep turnover low.
• Laundry: If you plan to offer a washer/dryer for an extra monthly fee, or if your multi-family unit has a coin-operated laundry facility, you can budget for this as part of your expected cash flow. Don’t assume your tenants will pay for laundry, though.

Expenses

• Property Taxes: These are often underestimated, especially if the rental is owner-occupied (versus non-owner-occupied properties that qualify for more tax write-offs).
• Insurance: Get the actual number from your insurance agent, and use a deductible you can manage if you have a claim.
• Principal & Interest Payments: Don’t underestimate the amount you’ll need to borrow, and be aware of their terms.
• Utilities (Gas, Water, & Electric): Residents will pay for these (unless you arrange otherwise), but you’ll have periods of vacancy that you’ll need to account for.
• HOA Dues: Make sure you know if a certain property is part of the Homeowner’s Association (HOA) — and if so, what their fees are.
• Lawn Care & Snow Removal: Even if you decide to have residents pay for these services, you’ll have vacancy periods to account for.
• Vacancy: Almost every new investor underestimates this cost. If you expect the unit to be vacant for one month each year, that’s 8.3% of your rent each month (1 month divided by 12 = 8.3%). Make sure the vacancy matches how quickly you can realistically rent the vacant unit to a new paying tenant.
• Advertising, Leasing, & Resident Screening: Plan to pay about a month’s rent for these items every month. That includes advertising your property, paying a realtor to help you find a renter, and screening applicants.
• Property Management: Even if you plan to self-manage the property, budget about 10% of rents every month for the infrastructure you’ll need to collect.
• Professional Fees: These may include accounting and other professional tasks you’d like to outsource.
• Repairs & Turns: Remember that older properties with lower rents will need more maintenance dollars than newer properties with higher rents. Consider the net dollar amount it will take to maintain the property as you pay someone else to work on the rental.
• CAPEX (Capital Expenditure): This is to budget for big-ticket repairs, like roofs, furnaces, and driveways. Use actual numbers based on the remaining life of these items at the property for a fair estimate.

If you’re still considering a real estate deal after going through your cash flow analysis, make sure you budget for every line item — for example, paying someone else to complete maintenance tasks, collect rent, mow the lawn, and so on. Otherwise, you’ll end up creating a bunch of little jobs for yourself and spending too much personal time on your rental.

By leaving enough margin in your property deals to pay for staff and services up front, you won’t have to do everything at the rental yourself. I suggest these conservative monthly estimates for revenues and expenses that follow my cash flow analysis (and allow for margin to grow while freeing up time).

Revenues

• Monthly Rent: $1,350
• Late Fees & Pet Fees: $0
• Application Fees: $4 (based on a $50 application fee, once a year)
• Laundry: $0
• Total Revenue: $1,354

Expenses

• Property Taxes: $93 ($1,116 annual)
• Insurance: $60 ($716 annual)
• Principal & Interest Payments: $583 (based on a 30-year, $100,000 loan at 5.75% interest)
• Utilities (Gas, Water, & Electric): $19 (based on potential vacancies)
• HOA Dues: $0
• Lawn Care & Snow Removal: $8 (based on potential vacancies)
• Vacancy: $112
• Advertising, Leasing, & Resident Screening: $117
• Property Management: $135 (10% of collected rents)
• Professional Fees: $25 (accounting)
• Repairs & Turns: $200
• CAPEX (Capital Expenditure): $91
• Total Expense: $1,418

Net Income/Loss: $89 Loss

Nobody wants to be losing $89 a month on their property, but here are some benefits you’ll have:

• You’ll control an asset worth well over $89 a month.
• You’ll gain equity each month you pay down your property’s mortgage.
• You’ll eventually pay off the mortgage, resulting in an increased (positive) cash flow.
• Since you’ve budgeted properly for repairs, your rental will increase in value.
• You won’t have to manage everything yourself, as you’ve budgeted for someone else to do the work on each line item.

There are worse deals out there than this example, but there are better ones, too. Try to only buy properties that bring in more cash than the principal payment you owe each month. Then, you’ll at least have a positive cash flow as long as rent is still coming in.

Once you start bringing in revenue, it’s important to set money aside each month for expenses like repairs and CAPEX. You hopefully won’t have to deal with these every 30 days, but it’s better to be prepared and leave yourself a cushion in case things go south.

I suggest setting up a maintenance bank account for your property so you’re not tempted to dip into your cash flow. A monthly deposit of $6,000 to $8,000 for repairs seems high, but this reserve can help you keep operating efficiently if a resident moves out and leaves the place a mess, or if an unexpected (and costly) repair pops up.

One thing to keep in mind: If you’re in acquisition mode for a property, the bank will require you to have three to six months’ worth of mortgage payments (principal, interest, taxes, and insurance) as cash in your account. The bank will also accept a cash equivalent, like an IRA or a whole life insurance policy, for reserve.

Setting cash aside is also helpful if your lines of credit get shut down for some reason. If and when you’re running low on working capital — the money you use to operate your business every day — you’ll want to have cash reserves on hand so you don’t have to rely on credit cards.

I made the mistake of continuing to invest in more properties and relying on my lines of credit instead of setting cash aside for worst-case scenarios. And when the Great Recession hit, that was my worst-case scenario. Because my money was tied up in struggling credit lines, I couldn’t buy paint, cleaning supplies, or anything for my rentals. I was even down to my last few gallons of gas because my credit card was declining at the pump.

In that moment, I realized that owning 92 rentals wasn’t worth being unsure if I’d make it home. And if I’d been setting aside emergency cash instead of depending on credit cards, I never would have been in that situation.

Many rental owners struggle to admit they need help managing their properties and can’t do everything on their own. This will lead to you hiring yourself for all the little jobs that need to get done, and it won’t do anything to grow your business or free up your time. It’s the same mistake I made before I decided to implement consistent systems.

My mistakes led me to step back and determine my vision — that is, what I was trying to accomplish in the first place. I then built my property management system (my infrastructure) and clarified my process for running my rentals.

With this VIP Method (Vision-Infrastructure-Process), I was able to stop pouring so much money into my properties and start making time for life outside of business — like my wife, kids, hobbies, and other things I love. And now, I get to teach others this method so they can avoid the mistakes I made, grow their portfolio, and get their personal life back.