Real Estate Analysis Learn How Much Cash Flow Is Good for Rental Property by Abdallah Allabadi February 12, 2019February 11, 2019 by Abdallah Allabadi February 12, 2019February 11, 2019 Do you want to make money by investing in rental properties? Then you must first learn the importance of cash flow. Most beginner real estate investors invest in rental properties for cash flow because it is essentially the shortcut to building your wealth in real estate. But how much cash flow is good for rental property? And how can you spot positive cash flow properties? Keep on reading this article for answers. Cash Flow: What Does It Mean in Real Estate Investing? Simply put, cash flow is the difference between the gross rental income of a rental property and its expenses. Expenses include financing costs (mortgage payments), taxes and property insurance, maintenance costs, and other miscellaneous costs such as property advertising. Cash flow tells you how much money you are gaining from the rental property, but don’t forget that you are also making money from equity growth and property appreciation. Related: Learn Here How to Invest for Cash Flow in Real Estate How much cash flow is good for rental property depends on the investment and the real estate investor. An experienced investor with more money and a larger real estate portfolio would want higher cash flow and a higher return on investment than a beginner real estate investor. Generally speaking, there are 3 types of investment properties when it comes to cash flow investing: 1- Negatively Geared Property When an investment property has higher expenses than rental income every billing cycle, then it is a negative cash flow property. This is a nightmare for most real estate investors. However, some accept the losses, hoping that they will make up for it through capital growth. In the meantime, an investor following this strategy will have to cover rental expenses from pocket or from the cash flow of another rental property. In the long run, investing in a negatively geared rental property is not favorable as you might risk losing the investment property if capital growth doesn’t occur. 2- Neutrally Geared Property A neutral cash flow situation is when you neither make nor lose money from the rental property, a break-even scenario. In that situation, you can opt to increase the rent or cut down on some costs. For example, if professional property management is costly, then you might consider doing it yourself. 3- Positively Geared Property When it comes to how much cash flow is good for rental property, positive cash flow is definitely the optimal situation. The best cash flow rental properties are those with positive cash flow at the end of the billing cycle. This way the investment property pays for itself while you still enjoy extra cash income. To find the best positive cash flow properties in your city and neighborhood of choice, click here. Related: Why Positive Cash Flow Is a Must With Income Properties How to Calculate Cash Flow Let us now illustrate the cash flow calculation using a 5-unit multi family rental property ($800/month each) as an example. Purchase price: $400,000 After a 20% down payment – $320,000 are financed A mortgage for 30 years at 5% – $1,720 monthly payment Taxes and insurance around $4,000 per year 6% vacancy and 1% miscellaneous costs Cash flow calculation: 1- Gross rental income $800 x 12 months x 5 units = $48,000 2- Mortgage payments + insurance + taxes – $1,720 x 12 months + $4,000 = $24,640 3- Vacancy cost = 6% x $48,000 = $2,880 4- Other costs = 1% x $48,000 = $480 Cash flow = $48,000 – $24,640 – $2,880 – $480 = $20,000 or $1,667 per month of positive cash flow. How Much Cash Flow Is Good for Rental Property? – The Truth Since cash flow is merely a value, it is difficult to say how much cash flow is good for rental property. While it is correct to say that the more cash flow you get out of a rental property, the more money you will make, other real estate metrics quantify cash flow for a better understanding of an investment property’s performance. Cash on cash return and cap rate are the most well-known indicators when it comes to measuring the performance of a rental property. Unlike cash flow, these metrics are expressed as percentages which can be used to compare different investment opportunities. Cash on cash return is a ratio that measures the annual cash flow before tax to the total amount of cash invested in the property. Since cash on cash return is represented as a percentage, it is a better representation of cash flow. How Much Cash Flow Is Good for Rental Property? – What Matters When it comes to real estate investing, some factors play an important role in deciding how much cash flow a property is going to make. Location Location is the most important factor that governs the cash flow of a rental property. It is not fair to compare an investment property in a prime location to another location with low demand. Despite the higher rental income of a property in a prime location, other expenses are high as well. Real Estate Investment Strategy A short term rental strategy like Airbnb rentals tend to yield higher cash flow than traditional long term rentals. However, you should be aware of the higher risks involved in owning an Airbnb rental. Check the local laws for short term rentals before you consider investing in Airbnb property for cash flow. Investment Property Type Different property types have different cash flows. A multi family rental property can surely yield a higher cash flow than a single family rental. The risk of facing a 100% vacancy is much less when owning a multi family rental. Mashvisor: The Fastest Way to Find Positive Cash Flow Properties As a real estate investor, you can never go wrong with Mashvisor’s rental property calculator. This innovative real estate investment tool allows you to find positively geared rental properties by providing cash flow analysis as well as other important real estate metrics like cap rate, cash on cash return, and occupancy rate. Related: How to Find Positive Cash Flow Properties And if you’re looking for the best location for cash flow properties in the US, search no more! Mashvisor is your number one source when it comes to finding the best locations to invest in real estate. To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here. Start Your Investment Property Search! START FREE TRIAL Cash Flow 0 FacebookTwitterGoogle +PinterestLinkedin Abdallah Allabadi Abdallah is a civil engineer with Masters in Real Estate and Facility Management. He focuses on writing about real estate analysis and the top locations for buying properties. Previous Post Invest in Real Estate in the 10 Highest Cap Rate Cities in 2019 Next Post 5 Best Upgrades for Rental Property to Increase Rent Related Posts PropertyRadar: What Is It, and How Is It Helping Real Estate Investors? What’s the Best AirDNA Alternative for Airbnb Data Analysis? How to Go About Researching Investment Properties Heatmap Analysis: The Secret to Successful Real Estate Investing When to Use Cash-on-Cash Return for Analyzing Real Estate Investments The Beginner’s Guide to the Cap Rate Calculation in Real Estate Price to Rent Ratio by City – Where to Invest in 2020 Real Estate Investing Terminology: Cash on Cash Return What Is a Good ROI for Real Estate Investments? 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