In today’s interest-rate environment, using a rental property’s Free Cash Flow to determine its value will significantly understate its potential return as an investment. For those who don’t know, Free Cash Flow is basically the money you are left with once mortgage payments, property taxes and maintenance/upkeep expenses are paid. Some rental investors take the amount they are left with (the Free Cash Flow) each year and divide it by the amount of their investment to calculate their return. For example, if you make a down payment of $150,000 on a rental property and at the end of the first year you have $1,500 of rental income left over after paying all expenses including your mortgage payments, your investment return using Free Cash Flow would be 1% ($1,500/$150,000). It should come as no surprise then that investors who value income properties this way are not lining up to buy right now. But there is a big piece of the investment return missing, and it is a by-product of our current low interest rate environment.Read more: Link
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