Knowing how to calculate cash flow is a key basic when making any real estate investment. Let’s get into the details.
To be ahead of the real estate investing game, you need to make some great real estate investments. Everyone in the business is in it to win it; always chasing after the best deals and the best investments. But how do the best actually become the best? Well, they know their numbers, and one of the most important numbers in real estate investing is cash flow. Every real estate investor should understand cash flow and know what that final number actually represents. This blog is going to walk you through the process of how to calculate cash flow for an investment property. Here’s what you need to know.
What is Cash Flow?
Making money in real estate is the goal. Knowing how to calculate cash flow is one step closer to that goal. You can’t just invest in any rental property that comes your way and expect it to make a profit. A lot of research comes before you can make any real estate investment. This research is done to ensure success and to give you confidence in the real estate investment. It’s done to measure the investment’s profitability to give you an idea of what kind of return on investment to expect. A key factor in return on investment is cash flow.
To put it simply, cash flow is the net operating income – the amount of income left after all the expenses and bills have been paid. Typically expressed as a monthly dollar amount, the cash flow of income producing assets is very important. When investing in income properties, such as a multifamily home or a vacation home rental, understanding how to calculate cash flow is essential to the investment’s success.
Positive Cash Flow vs Negative Cash Flow
Cash flow is an indicator of whether or not the rental income (or any other type of income) you’re making from this investment property is sustainable. It is a good sign if the total income covers all the expenses required to operate the investment property. However, in most cases, having it break-even isn’t good enough. The ideal investment property is one with positive cash flow. Positive cash flow is when the rental income exceeds the rental expenses, meaning you’ll have enough to cover these costs and more left over.
Negative cash flow, on the other hand, is when rental expenses exceed your rental income. This is the worst case scenario for any real estate investors – you’re losing money because the income generated by the rental property isn’t enough to cover the costs to run it. That’s why it’s crucial to do your research before making any real estate investment. With Mashvisor, all your real estate investment decisions are made easier. Months of research turn into minutes, and all from the comfort of your own home. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
How to Calculate Cash Flow
In order to understand cash flow, you need to know how to calculate cash flow. Some might see it as a very easy calculation, and the basic formula is actually quite straightforward – simply subtract the expenses from the income:
Cash Flow = Total Income – Total Expenses
Like I said, it’s a very straightforward formula. However, it’s the calculations required to find the income and expenses which may confuse some real estate investors. The complexity of reaching the two final factors of the cash flow formula is where it gets tricky. Let’s clear it up a bit.
The first part of understanding how to calculate cash flow is simpler than the second. Usually, the total income is the same amount as the total rent. Rental income is just the amount of rent you collect from all the tenants at the end of each month. However, there may be other sources of income you’d need to account for, like laundry income or parking fees – if you provide such services for your tenants. It’s important to go over all possible sources of income when analyzing a property for cash flow.
This is the tricky part. When it comes to the expenses part of how to calculate cash flow for an investment property, a lot of people don’t even know where to start. There is a very long list of different expenses associated with rental properties. The tough part is that not every investment property has the same expenses.
Another complication is that not all expenses occur every month. Thus, you may be looking at the same rental property but face different expenses every month. That’s why it’s important to keep a good track of all your rental expenses. Here are a number of expenses you might come across when owning a real estate rental property:
- Mortgage Insurance
- Property Insurance
- Property Taxes
- Property Management
- Vacancy Rate
Those are just a few of the expenses associated with rental properties. There are usually property-specific expenses that you need to also include in your cash flow calculation.
How to Calculate Cash Flow the Easy Way
We wouldn’t leave you hanging with all these different factors and variables involved with calculating cash flow. You’ll be happy to know that there is another way! I quickly mentioned Mashvisor above saying we can help you make faster and smarter investment decisions. Calculating cash flow is just one of the many ways we can help.
Manually calculating the total expenses and monthly rental income associated with an investment property could take hours. The worst part is that your final answer might not even be accurate due to the possibility of error that comes with manual calculations. Therefore, you should forget manual calculations and start using a cash flow calculator!
A part of Mashvisor’s investment property calculator is the cash flow analysis. In this section of the investment property calculator, cash flow is digitally calculated for you. Alongside other important real estate metrics such as cap rate and occupancy rate, cash flow is quickly and easily calculated in a matter of minutes. All you need to do is input the costs of your investment property and let our calculator do the rest.
How to calculate cash flow? Use Mashvisor’s tools. To learn more about our product, click here.