Many real estate investors invest in rental properties for cash flow. Investing in a good cash flow rental property can help an investor realize profits and achieve financial independence. But you might wonder: what’s considered a good rental property cash flow? Keep on reading to know all about real estate cash flow.
What Is Rental Property Cash Flow?
Let’s say you own a rental property and you lease it to tenants for a monthly rental income. The rental property cash flow refers to the amount of income that is left over after all expenses and bills are paid. Real estate investors use cash flow calculations to know if they are making money from a rental property and how much of it is being made.
When rental properties generate more rental income than expenses, they are referred to as positive cash flow properties or positively geared property. This is the optimal case for an investor since it means they’ll have enough money to cover all the costs and more left over. On the other hand, when a rental property has higher expenses than rental income, it represents a loss for the real estate investor. In this case, it is referred to as negative cash flow rental property or negatively geared property.
How to Calculate Cash Flow on Rental Property
Understanding how to calculate rental property cash flow is essential to a real estate investment’s success. So let’s have a look at the cash flow formula:
Rental Property Cash Flow = Total Income – Total Expenses
The rental property cash flow formula might seem pretty simple when first looking at it: you just have to subtract the expenses from the income. However, it’s when it comes to determining the income and expenses that things can be tricky. There are countless things that must be accounted for to get the job done correctly. So, let’s look into each term separately:
Most of the time, the total income is the same as the total rent you collect from your tenants over the course of a year. So, if you charge your tenants a certain sum each month, the annual rental income is simply that monthly number multiplied by 12. However, there may be other sources of income you would need to account for. You might, for example, be providing additional services for your tenants for a fee, such as laundry, parking, gym, etc. So be sure to include those as well in your total income.
When it comes to determining the total expenses, the challenge for many investors is to identify which expenses need to be accounted for. In fact, there is a very long list of different expenses associated with rental properties, and these expenses may vary from one investment property to another. Another thing is that not all expenses occur each month. Possible rental property expenses include utilities (water, electricity, gas, sewage), property taxes, mortgage payments, insurance, property management, trash collection, landscaping, maintenance and repairs, vacancies, etc. Sometimes there are seasonal expenses you can’t see coming, such as snow removal. And if you’re opting for an Airbnb rental strategy, expenses can include business or short-term rental licenses. So, make sure to include all the expenses you can think of when calculating cash flow on your rental property. Overlooking even one of these costs can change the final value of your rental property cash flow.
Rental Property Cash Flow Calculator
The best way to calculate cash flow is by using a rental property cash flow calculator. The alternative is to use rental property cash flow spreadsheets, which requires manual and tiresome analysis – not to mention that we are bound to make errors when doing manual calculations.
Related: Why an Investment Property Calculator Is Better Than Spreadsheets
Mashvisor’s Rental Property Calculator provides accurate rental property cash flow analysis in just a matter of minutes. It also displays other important real estate metrics such as cap rate, cash on cash return, and occupancy rate. All you need to do is input the different costs associated with your rental property (or you can use the provided cost estimates) and then the cash flow is digitally calculated for you.
How Much Cash Flow Is Good for Rental Property?
Since cash flow is just a value, it’s hard to tell what is a good cash flow for rental property. Good cash flow can mean different things to different people. In fact, classifying a certain cash flow as good is subject to personal judgment. So, what one investor may judge as good cash flow, another may find unworthy.
However, one thing’s for sure: positive cash flow is what all real estate investors aim for. Positive cash flow means your rental property pays for itself while you still enjoy a profit. The more positive cash flow you get, the more profitable the investment property is.
Related: Why Positive Cash Flow Is a Must with Income Properties
How to Determine If a Rental Property Will Cash Flow Positively
A number of factors can influence how much cash flow a rental property is going to make.
Location is the number one factor governing rental property cash flow. An investment property situated in a prime location will, no doubt, have a higher rental income compared to a property located in a low-demand area. But don’t forget that the expenses will also be higher for a primely located property.
Mashvisor’s Heatmap Analysis Tool can help you greatly in your analysis: it can tell you which neighborhoods offer better cash flow, based on rental properties in a given area. For example, in the Phoenix real estate market, the neighborhood of Estrella is a positive cash flow mine according to Mashvisor’s data!
Get data on Phoenix or any other city in the US real estate market now.
The cash flow value depends on the type of rental property. A rental property with multiple units will typically have a higher cash flow than an investment property with a single unit. Additionally, the risk of vacancies is reduced when you have multiple units. As a result, you can be sure that a multi family rental property will yield a higher cash flow than a single family rental property.
Rental Investment Strategy
The investment strategy of your rental property also has an important impact on cash flow. Airbnb (short-term) rentals tend to lead to higher cash flows than traditional (long-term) rentals. But they’re often associated with higher risks. So make sure to check all the local laws governing short-term rentals if you’re considering opting for an Airbnb rental strategy.
The method you use to finance your property can also affect cash flow. To avoid negative cash flow, it is recommended that you create a budget plan and follow it strictly. Make sure to check out all the different investment property financing methods to be sure you’re choosing the correct one for your property.
Related: 5 Steps to Find the Best Cash Flow Investments in Real Estate
The Bottom Line
Again, because cash flow is merely one value among many real estate metrics, it does not show you the whole picture of how your rental property is performing financially. To have a better understanding of a rental property’s performance, you need to express cash flow as a percentage. You can do so using either the cash zone formula or the cash on cash return formula.
Cash Zone Formula
The cash zone formula is used to compare the rental property cash flow to its value.
Cash Zone Formula = (Gross Annual Rental Income/Property Price) × 100%
It is believed that a cash zone percentage in the range of 8-10% indicates good cash flow for rental property. Anything higher is obviously better.
Cash on Cash Return
Cash on cash return (CoC return) is the ratio of a property’s annual pre-tax cash flow to the total amount of cash invested in the property.
Cash on Cash Return = (Pre-Tax Cash Flow/Total Cash Invested) × 100%
A CoC return of 8% or more indicates good cash flow for rental property.
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