Real Estate AnalysisHow to Calculate Positive Cash Flow on Rental Properties by Eman Hamed December 5, 2019November 17, 2019 by Eman Hamed December 5, 2019November 17, 2019In previous blogs, we covered what is positive cash flow and the important role it plays in successful real estate investing. To recap, the positive cash flow definition is the money you get at the end of the month after deducting all expenses from rental income. As you can expect, getting real estate positive cash flow is key to making money from a rental property. Essentially, it means the property pays for itself and you don’t need to worry about losing your investment if the housing market faced a downturn! Knowing how to calculate positive cash flow is also important to narrow down your search and find a profitable investment property for sale that’s worth your while.Some beginner real estate investors, however, don’t know the actual formula for cash flow. One might say “my rental property makes $1,300 in rent and the mortgage payment is $1,000 a month. This means I’ll have $300 monthly positive cash flow!” This investor is in for an unpleasant surprise. Calculating positive cash flow on investment properties goes far beyond mortgage payments. Rental properties come with many other expenses and you need to understand and account for them all in your calculation. To help you out, we’ve prepared this guide to teach you how to calculate positive cash flow step by step. Let’s get started.Step 1: Determine Gross Rental Income In line with the positive cash flow definition, the first part of the formula for cash flow is the rental income. So step #1 is to simply calculate how much to charge for rent. The best way to do that is by running a CMA (comparative market analysis). This requires you to find at least three rental properties that are similar to yours in the same area. They have to be similar in type, the number of bedrooms and bathrooms, age, size, as well as the property’s condition. Find out what landlords of these rentals are charging and calculate the average rental rate. This is the average rent you can expect to collect from tenants.This is just a quick explanation. Find more details here: Comparative Market Analysis: A How-To Guide for Real Estate Investors.But that’s not the end of this step. Now you need to calculate your gross rental income. Meaning, if you have other sources of income from the property besides the collected rent, add them in your calculation. For example, say you own a small multi-family investment property of 3 units, each one is rented out for $500 per month. Say that you also have parking space which you rent out separately and it generates $300 per month. In this case, your gross rental income would be ($500 x 3) + $300 = $1,800.Step 2: Deduct Operating ExpensesThe next step in how to calculate positive cash flow in real estate is to subtract your operating expenses from the gross rental income. Operating expenses are basically the everyday expenses and recurring costs that come with owning rental properties (not including financing). If you don’t pay these expenses, you won’t be able to operate and rent the real estate investment. They include things like management costs, vacancy reserves, property taxes, insurance, appliances, repairs, maintenance, etc. For example, the above income property might come with the following monthly operating expenses:Vacancy: $90Management: $180Taxes: $170Insurance: $120Repairs/Maintenance: $90Hence, operating expenses equal to $650. Simply deduct this from the gross rental income and you’ll get $1,150. This number is called the net operating income (NOI) which is helpful as it starts to give you an idea of how much positive cash flow you’ll have available to pay lenders. However, as you’ll see in the next steps, it’s missing a few numbers that should be included when calculating real estate positive cash flow.Step 3: Deduct Capital ExpensesMost real estate investors can estimate the costs of repairs, vacancy, and property management fairly easily. But the one area nearly every new investor struggles with is Capital Expenses (CapEx). Also known as capital expenditures, CapExs are those expensive “big ticket” items that wear out over time and need to be replaced to keep the income property in good shape. They are replaced not every month or every year, but every so often. They could include roofs, driveways, heat-and-air systems, plumbing systems, or any other large item you should budget for.So, say you budgeted for $900 a year ($75 a month) for CapEx. Continuing with our example, the 3rd step in your positive cash flow calculation is to deduct that from the NOI ($1,150 – $75 = $1,075). This number is what real estate investors refer to as cash flow from operation.Step 4: Deduct Financing Costs Most real estate investors use borrowed money to finance their rental properties. This is why the financing costs are the most important part of how to calculate positive cash flow. As you’ll see from our example, the regular payments you make to the lender will have a huge effect on cash flow. In order to ensure you have enough cash flow to pay your lender and leave an extra profit for yourself, you need to figure out cash flow after financing. To do so, simply subtract the monthly payments on the loan from the cash flow from operations. You can use an online mortgage calculator to easily calculate your financing cost in no time.Related: Investment Property Mortgage Rates in 2020: All You Need to KnowFor example, say that the purchase price of the previous multi-family investment property was $300,000. To buy this rental property, you took out a 30-year mortgage loan with a fixed interest rate of 6% and put 20% of the purchase price as a down payment. Using an online mortgage calculator, your monthly mortgage payments are $360. Deduct this from $1,075 cash flow from operations and you’ll get $715. This is the cash flow you’ll get after paying your lender, but is this the money you’ll get to keep as profits from the rental property? No – there’s still one final step to calculating positive cash flow in real estate.Step 5: Deduct Taxable Rental IncomeAfter paying the operating expenses, capital expenses, and mortgage payments, real estate investors still have to pay taxes on their rental income. The last step, then, is to find out how much of your rental income is taxable and deduct that from cash flow after financing. The number you’ll get is called cash flow after tax – the cash flow that you’ll get to keep for yourself! Depending on where your investment property is located, you’ll have a predetermined income tax rate. To find out how much tax you’ll have to pay on the rental income, simply take the annual gross rental income and multiply it by your income tax rate.For our example, let’s assume the income tax rate in the location of your income property is 15%. Annual gross rental income is ($1,800 x 12 = $21,600). Multiply that by 15% and you get $3,240 – this is the rental income tax you’ll have to pay on the profits you make during tax time for the year. To make sure you get positive cash flow from the rental property, you have to budget for this in your monthly rental expenses ($270 per month). So, the final step is to deduct this from the cash flow after tax ($715 – $270 = $445). This is money that goes back to your pocket as real estate positive cash flow!So, the formula for how to calculate positive cash flow on rental property is: Gross Rental Income – Operating Expenses – Capital Expenses – Financing Costs – Taxes = Cash Flow$1,800 – $650 – $75 – $360 – $270 = $445Cash Flow Calculator for Real Estate InvestorsNow that you understand how to calculate positive cash flow on income properties, you realize that there are a lot of expenses involved. This can leave beginner real estate investors overwhelmed – if you forget to account for an expense, the final result would be incorrect. Because no one wants to make investment decisions based on inaccurate data, we’ve got a solution for you: the Rental Property Calculator. This is a must-have real estate investment tool that will help you run your numbers with the power of predictive analytics.Related: Where Can You Find a Rental Property Calculator?Essentially, it provides you with pre-calculated data for thousands of investment properties for sale in the US housing market. All you have to do is simply find a property that interests you for real estate investing, enter your financing information, and the Rental Property Calculator will handle the rest. To calculate positive cash flow, it takes into account your rental income and subtracts your expenses and mortgage payments. It also allows you to adjust expenses as you see fit for more accurate results. In just a few minutes, you can make informed decisions not only based on the cash flow which the property will generate but its cap rate and cash on cash return as well!Mashvisor’s Rental Property CalculatorWhere can you find this tool? Right here on Mashvisor! To start using our Rental Property Calculator to find and analyze the best positive cash flow property for sale in your city and neighborhood of choice, sign up for Mashvisor. Start Your Investment Property Search! START FREE TRIAL Cash FlowCostsInvestment CalculatorInvestment Property AnalysisMaking MoneyRental Income 0FacebookTwitterGoogle +PinterestLinkedin Eman HamedEman is a Content Writer at Mashvisor. With a focus on market reports, she enjoys researching the state of the real estate market in different cities across the US. Eman also writes about trends, forecasts, and tips for beginner investors to gain the confidence and knowledge they need to make wise decisions. Previous Post How to Invest in Real Estate: 10 Ways for 2020 Next Post 10 Reasons Real Estate Agents Fail (and How to Avoid Failure in the Business) Related Posts What Is a Good Return on Investment for Real Estate? The Top Real Estate Websites That Will Make Every Investor Succeed 9 Tips for Achieving a Higher Value During Home Appraisal IRR vs ROI in Real Estate: What’s the Difference? How to Make the Most From the Best Real Estate Websites Should You Invest in Airbnb Nashville in 2018? Real Estate Investing Terminology: Internal Rate of Return (IRR) What Is Cash on Cash Yield in Real Estate? The Ultimate Guide to Cash on Cash Return in Real Estate Investing How to Conduct a Thorough Airbnb Investment Analysis What Is a Good ROI for Investing in Income Properties? Where Can You Find a Positively Geared Property for Sale?