It’s common knowledge in real estate that the goal of renting out a property is to generate high cash flow. Cash flow is the driver of successful rental properties. So most real estate investors are in the market hunting for cash flow properties. But what exactly is a good cash flow for rental properties? In this blog post, we’ll talk a deep dive into what cash flow is and how much cash flow is good for rental property.
What Is Cash Flow?
Real estate cash flow is the difference between the rental income and rental expenses of an investment property. With that definition, calculating cash flow is fairly straightforward:
Cash Flow = Total Rental Income – Total Rental Property Expenses
Essentially, cash flow tells a real estate investor if his/her rental property is profitable and how much money is being made. A positive cash flow property, or a positively geared property, is one that generates more in income than in expenses. Negative cash flow properties, on the other hand, have higher expenses than rental income. As a result, negative cash flow properties serve as a loss for real estate investors.
What Is a Good Cash Flow on Rental Property?
Knowing how to calculate cash flow, it is apparent that positive cash flow is considered a good cash flow. The higher rental property cash flow is, the more profitable. Still, can a ‘good cash flow’ be specifically quantified? The answer is more complicated than a simple yes or no.
The reality is that cash flow is influenced by a variety of factors in real estate. In order to effectively know what is a good cash flow on rental property, we need to take the following variables into consideration.
You’ve probably heard it a thousand times, but the three most important things in real estate are location, location, and location. This is especially true when you’re trying to find cash flow properties. A property’s rental income is heavily influenced by its location. The same can be said for many rental property expenses, such as property taxes, interest rates, and association fees. In addition, there are other factors at play in each location. An area’s short-term rental legislation, for instance, can restrict Airbnb cash flow due to various permit requirements and other rules. If the area has rent control laws, the rental income potential may be limited. Demand for traditional rentals (which can greatly affect rental income) is dictated by local economic trends. All of this will affect the cash flow.
2. Property Type and Price
What is considered a good cash flow also depends on the property type. Different property types can have different potentials for earning rental income based on the number of units that can be occupied at one time. Multi-family rental properties, for instance, have more rental units than a single-family property. As a result, multi-family properties generally have a higher potential for cash flow than their SFR counterparts.
The price of the property also plays a role. Properties that are more expensive usually fetch a higher cash flow than less expensive rental property investments. This is because you can usually charge a higher rental rate for a variety of reasons whether it’s additional amenities, more space, or even a better neighborhood.
3. Rental Strategy
Like property type, rental investment strategies also influence what is a good cash flow on rental property. An Airbnb rental strategy, for example, generally yields more cash flow than traditional rentals.
4. Rental Property Financing
Lastly is rental property financing. Paying in cash or with a mortgage will significantly change cash flow. And if you do opt to use a mortgage, your interest rate and what you pay in terms of monthly mortgage payments can also affect how much money you make every month. To better understand the full effect of your financing method, you should use an investment property cash flow calculator, but more on that later!
So, How Much Cash Flow Is Good for Rental Property?
By expressing it as a percentage, we can come closer to setting a general rule of thumb for good cash flow. There are two ways to express cash flow as a percentage: by using cash on cash return or cash-zone.
Cash on Cash Return = (Annual Rental Income – Expenses and Costs) ÷ Total Cash Invested
Cash-Zone = Gross Annual Rental Income ÷ Property Price
With both formulas, anything above 8 percent can be considered good. Still, we need to look at the four previously mentioned factors to obtain the true range of good cash flow for a property. For example, in large, hot markets like San Francisco, good cash flow could be lower. So using a single number as a guideline doesn’t always work. Rather, you want to look at the full picture.
How to Easily and Accurately Decide If the Cash Flow Is Good
So, what is the best way to calculate cash flow and determine what is good? By using Mashvisor’s investment property cash flow calculator! Mashvisor’s cash flow calculator estimates cash flow using data, such as the four factors listed above, to accurately calculate a property’s cash flow. Because it uses big data and predictive analytics and takes into account real estate trends, Mashvisor’s tool provides a comprehensive estimation of cash flow for any rental property. It will allow you to quickly compare the cash flow for different rental properties for sale. That way, you can easily determine what is a good cash flow for you.
Mashvisor’s calculator is easy to use and quick to provide results. All you need to do is select your desired property and enter a few inputs to see a property’s estimated cash flow. As such, Mashvisor performs the following functions to predict profitability:
- Predicts the monthly rental costs
- Estimates the monthly rental income
- Calculates cash flow
- Computes return on investment
This means you can get a list of the best cash flow investments in minutes! Not only does Mashvisor estimate cash flow for any property, but it also projects cash flow based on rental strategy. As a result, you can quickly find out whether using a property as an Airbnb or a traditional rental will yield more profit.