Like any other business, investing in real estate rental property requires lots of research. A critical part of the process is understanding how property will generate cash flow from rental operations.
Knowing how to calculate rental property cash is one of the essential concepts that aspiring real estate investors have to understand before going into rental real estate. After all, it’s the most crucial thing in the rental real estate sector. Luckily, calculating cash flow has been made easy with this handy rental cash flow calculator.
Another importance of learning how to calculate cash flow for a rental property is that it helps you concentrate on owning investment properties with good cash flow and avoid the properties that could impede your profit.
Before we discuss how to calculate rental property cash flow, let’s take a quick look at the cash flow concept in real estate.
Meaning of Cash Flow in Real Estate?
Cash flow is the variation between your property’s income and other expenses, like debts. In real estate, cash flow is mainly used for properties that generate income, such as rental estate like a duplex, apartment complex or a commercial building.
In rental real estate, a property can either have an encouraging cash flow or a negative cash flow; when there is more income than expenses and financing, the cash flow is encouraging and positive. On the other hand, if the expenses and financing are more than the income, and the investor keeps losing income each month, the cash flow is negative.
Every real estate investor’s goal is to own a rental property with an encouraging cash flow. The more positive cash flow a property has, the more income and return you’ll earn as an investor.
When you have a higher positive cash flow you can comfortably have safety nets for sudden expenses like fixing air conditioner or furnace or fixing a burst pipe. The more positive your cash flow is, the more you’ll maintain your business expenditures, especially in tough times like this. Check property for sale in Paphos.
To prevent a negative cash flow, you’ll need a real estate investment property calculator to track all your expenses.
Steps to Calculate Rental Cash Flow
Calculating a rental cash flow is an easy process, especially with a handy rental cash flow calculator; here are four steps to guide you:
- Determine the total income of your rental property
- Subtract all costs related to the property
- Deduct every debt related to the rental property
- The difference you get after these is the cash flow of your property.
Now, let’s look at these steps in detail:
1 – The gross income of a property is the total earnings from all sources before expenditures and payment of fees are made. Properties like commercial property have many income sources like moving supplies, late fees, in-place laundry e.t.c. In contrast, specific properties like single-family rental will have only one income source: rental income.
2 – The expenses related to property depends on the type of property. A residential property with a total lease will have more expenses than a commercial property with a net lease. Property expenses include taxes, insurance, business licenses, advertisement fees, utility expenses, and other fees. Calculate the costs required to look after that property; this will give you an idea of the cash flow.
3 – When you subtract the property expenses from the total income, you’ll be left with the net operating income (NOI) which is your cash flow. If there are other services like debts, they can be subtracted after the expenses to get the property’s cash flow.
Calculation of Cash Flow in Numbers
Below is an example of how to calculate the cash flow of a rental property for an occupied duplex with in-place laundry. The seller of the property is asking for a sum of $350,000. Here’s a list of the property expenses every month:
| Rental fee | $4,000 |
| Vacancy rate | -$400 |
| Repair and maintenance | $400 |
| Laundry income | $375 |
| Insurance fee | $183 |
| Taxes | $216 |
| Gross income | $3,975 |
| Property management | $400 |
| Repairs and maintenance | $400 |
| Trash and sewer | $300 |
| Total expenses | $1,499 |
| Net operating income (NOI) | $2,476 |
| Debt service | $1,769.79 |
| Total monthly cash flow | $706.21 |
| Total annual cash flow | $8,474.52 |
| Net Return | 2% |
Cash flow is a task of many inputs, and any of them can change at any time, leading to damage or improvement in a system. Most of the changes in these inputs are influenced by the economy or the market.
For example, a local employer might leave, thus resulting in a swift decrease in rental property demand overnight. You can’t stop these things, but you can control them by playing your part in boosting employers’ health and plans by partnering with organizations that offer such.
Other factors that you cannot control include property insurance and real estate taxes. Taxes can increase at any time, raising operating costs and lowering operating income, thereby decreasing the cash flow. Luckily, you can compensate for these negative factors with other factors you have control over.
For instance, you can reduce income spent on maintenance, marketing, and management. You can also raise the rent if the rental market is strong, but this is to be done with care as it is a delicate balance that might increase vacancies. A significant loss of income from more vacant units can wipe out all profits from increased rents.
Conclusion
To calculate your cash flow efficiently, you’ll have to keep a rental property calculator because it provides you with the easiest way to calculate your rental cash flow.
It would help if you gave cash flow great importance because there’s a famous saying that cash flow is the king in real estate investing; having a positive cash flow is crucial in keeping your real estate rental property floating. As an investor, positive cash flow should be your priority as the more positive cash flow you earn from a property, the more income you can make and the more safety net you’ll have.
