A common mistake people make is thinking: 

Cash flow = Rent income - Mortgage 

This is far from the truth. 

The real formula for cash flow is: 

Cash Flow =  Rent Income - Mortgage - Maintenance - Capital expenditure - Property management

That’s the true formula for cash flow. 

And MANY new landlords make this mistake of buying property and then end up being completely BROKE after something like a water heater breaks. 

Then the property starts to deteriorate. 

The costs start piling up.

Tenants move out because nothing is being fixed.

This is 90% of most landlord situations. 

All because they were mistaken in believing that they actually have cash flow… 

When they don’t. 

So rule #1: 

Make sure there is ENOUGH cash flow. 

Rule #2… 

Properly Budget for maintenance and expenditures.

What type of property maintenance and expenditures?  

There are yearly property maintenance you have to do (we’ll list them below), and there are big ticket items you must save for. 

Here’s a list of yearly property maintenance that cost you $$ out of pocket: 

1. Lighting: You’ll get lots of calls from tenants who can’t replace a light bulb (face in palm)… 

2. Gutter Cleaning: Ensure gutters and downspouts are clear of debris to prevent water damage and foundation problems.

3. Roof Inspection: Check for loose or missing shingles, leaks, or any other damage that may lead to bigger problems down the line.

4. Landscaping: Regular mowing, pruning of shrubs, tree trimming, and refreshing mulch. Additionally, consider seasonal tasks like leaf removal in the fall.

5. Pest Control: Schedule periodic inspections for termites, rodents, and other pests. Even if no problems are visible, preventative treatments can be worthwhile.

6. HVAC Maintenance: Change air filters regularly and have the system serviced at least once a year to ensure efficiency and longevity.

7. Plumbing: Often you get plumbing issues like leaky faucets that have to be corrected. Look for any slow drains, leaky faucets, or toilets that run constantly. Addressing these early can prevent more expensive repairs later.

8.. Safety Checks:* Regularly test smoke detectors and carbon monoxide detectors, replacing batteries as needed. Ensure fire extinguishers are in working condition

9. Appliance Maintenance: Often, washers, dryers, water heaters, etc break down. Clean and service appliances like the refrigerator, dishwasher, oven, and washing machines to extend their lifespan.

Budgeting for these tasks ensures you can address issues before they escalate into more significant problems, saving money in the long run. Plus, a well-maintained property is more attractive to current and potential tenants.

List of capital expenditures: 

Capital expenditures (CapEx) are the large, infrequent expenses that landlords should plan for as they relate to the overall improvement or maintenance of the property. These are not your typical monthly or annual operational costs but are essential for keeping the property in its best condition over the long term.

These things below are unavoidable.

They WILL happen sooner or later and they are PRICEY (A roof is at least $10,000). 

 Here's a list of capital expenditures landlords should budget for:

1. Roof Replacement: Roofs don't last forever. Depending on the material used, you might need to replace it every 20-30 years, sometimes sooner if there's significant damage.

2. Window Replacement: Older windows might need replacing to improve energy efficiency and aesthetics.

3. Exterior Siding or Painting: Whether it's replacing siding or repainting the exterior, it's an investment that can both protect and rejuvenate the appearance of a property.

4. HVAC Systems: Furnaces, air conditioning units, and other HVAC components have a finite lifespan, typically around 10-15 years.

5. Water Heater Replacement: Most water heaters last between 8-12 years, so you'll need to replace them occasionally.

6. Plumbing and Electrical Systems: Overhauls or major updates might be needed, especially in older properties that don't meet current codes or standards.

7. Flooring Replacement: Whether it's the wear and tear on carpets or damage to hardwood/tile, at some point, you might need a full flooring update.

8. Kitchen Renovations: This could include new countertops, cabinets, sinks, or a complete redesign to modernize the space.

9. Bathroom Renovations: Updating fixtures, tiles, showers, and tubs can enhance property value and appeal.

10. Appliance Replacement: Refrigerators, stoves, dishwashers, and other major appliances will eventually need to be replaced.

11. Foundation Repairs: Issues like settling or cracking can sometimes require significant repairs to ensure the structural integrity of the property.

13. Fencing: If the property has fencing, it might need repairs or total replacement after many years of weathering.

16. Septic System or Sewer Line Replacement: If the property isn't connected to a public sewer, septic systems might need major repairs or replacements. Similarly, sewer lines can become damaged or clogged.

When planning for capital expenditures, it's crucial for landlords to set aside funds regularly. This proactive approach ensures that they're financially prepared for these inevitable expenses, helping maintain the property's value and the comfort of its tenants.

Getting good Property Management. 

Vacancies will happen (another “budget” you should set aside for -- imagine 2-3 months of having to pay for mortgage out of pocket). 

A good property manager (PM) and take the headache off your plate. 

The average cost of a PM: 

5-10% of rental income