Every real estate investor is looking to make a good return on investment (ROI) from their rental properties. A good ROI typically boils down to good cash flow. So it’s important to understand what cash flow is, how it works, and how much rental property cash flow is considered good.
So, What Is Rental Property Cash Flow?
In simple terms, real estate cash flow is the difference between money going out from your rental (expenses) and money coming in (income). A positive cash flow is when income exceeds expenses, while a negative rental property cash flow is when expenses exceed income.
Here are some of the benefits of having a positive rental property cash flow:
- Creates opportunity – You can reinvest the profits from positive cash flow properties into other investment properties, thus growing your portfolio and earnings.
- Creates safety – The monthly income generated from cash flow properties will boost your savings, thus safeguarding you from unexpected life expenses such as car maintenance and medical bills.
- Creates freedom – When you generate steady profits from positive cash flow income properties, you will have time to focus on other projects that you are passionate about. You will also be able to spend more time with friends and family.
How to Calculate Rental Property Cash Flow
You can use a rental property or Airbnb calculator to do this but calculating rental property cash flow is very easy. Here is the formula:
Cash flow = Gross rental income (GRI) – Total expenses
Gross rental income is the total income generated from all sources before any expenses are incurred. Besides rent payments, GRI could also include income earned from renting appliances to tenants, parking space rental, pet fees, vending machines, late fees, or laundry machine access.
Operating expenses include all costs involved in running your rental property. This includes property management fees, legal fees, maintenance costs, property insurance, marketing costs, property taxes, business licenses, and utility expenses.
Related: How to Estimate Rental Property Expenses Before Buying
Another crucial thing you need to consider when computing rental property expenses is vacancies. Since a vacancy represents a loss in income, it should be included in your rental property cash flow calculation. Let’s say you own five units, and the rent for each unit is $500 per month. If one unit is vacant, you should add $500 to your operating expenses.
Related: Learn How to Calculate Vacancy Rate for Rental Property
Wondering how to calculate rental property cash flow quickly and easily? You don’t have to use an Excel rental property cash flow spreadsheet to manually compute cash flow. Instead, you can use Mashvisor’s rental property cash flow calculator to conduct cash flow analysis within minutes. This tool estimates monthly rental costs and projects monthly rental income and then calculates cash flow for you. It will also tell you which rental strategy (Airbnb or traditional) will produce more cash flow for your income property.
How Much Cash Flow Is Good for Rental Property?
Generally, any amount of positive rental property cash flow can be considered good. However, what makes cash flow ‘good’ varies from one investor to another. While some real estate investors are only interested in a minimum return on investment (ROI), others want to generate enough cash flow to meet specific cash on cash returns.
Here are some formulas you can use to determine if cash flow is good:
- The 1% rule – To establish if a rental can generate positive cash flow, use the 1% rule. This rule states that for an investment property to be considered a cash flow property, it should rent for no less than 1% of the purchase price. For instance, if you buy an investment property for $200,000, the rent should be at least $2,000 per month. However, just because a property satisfies the 1% rule, that doesn’t mean that you should rush to buy it. You must also consider other factors and expenses like HOA dues, vacancy rates, property taxes, insurance, and property management fees.
- Cash on cash return – This is calculated by dividing the net operating income by the amount of money invested in the property. For instance, if you make a down payment of $30,000 on a rental that generates an income of $4,000 annually (after paying bills), the CoC return would be $4,000/$30,000 x 100 = 13.3% In terms of cash on cash return, a good cash flow property is one that generates a return of 10% or more.
- Cash zone – Divide the gross annual rental income by the property price to get the cash zone. For example, if the gross annual rental income is $20,000 and the property price is $200,000, the cash zone will be $20,000/$200,000 x 100 = 10%. As a rule of thumb, the cash zone should be 8% or more for a good rental property cash flow.
How to Boost Cash Flow
No matter your level of earnings, the good news is that there are ways to boost your cash flow. Here are some strategies to consider:
- Minimize vacancy rates – Tenant turnover is one of the greatest cash flow killers. Think of how to keep your tenants happy in order to boost your traditional or Airbnb occupancy rate. First, be sure to respond to tenant requests and complaints in a quick and professional manner. Offer them privileges like free WiFi or subsidized access to the gym. Don’t be quick to increase rents when leases expire.
- Appeal property taxes – Property taxes are usually increased every year, thus eating into your cash flow. If you feel the increase is not fair, consider appealing to the local government.
- Preventative maintenance – Major repairs that are unexpected can have a negative effect on your cash flow. To avoid this, you need to conduct seasonal maintenance on major areas like plumbing systems and HVAC units.
- Renovate the rental property – You could improve the property by using updated finishes and installing energy-efficient appliances. Tenants will feel like they are getting value for their money.
- Increase rent – When you have made some renovations on a property, tenants would be willing to pay more since they are getting value for their money. They are also likely to stay longer.
- Refinancing – It is good practice to always keep track of the mortgage rates. If you see the rates dropping, you could consider refinancing. This will reduce your monthly mortgage payments and could turn a negative cash flow rental property into a profitable rental.
While there is no dollar amount we can label as “good cash flow,” it’s not difficult to figure out how much rental property cash flow is good for you and your business. As long as it’s positive and there is enough of a profit to achieve your real estate goals (whether that’s saving up for another rental property or just having some extra cash every month to spend), then you’re generating a good cash flow.