Learn How to Calculate Rental Property Cash Flow

Learning how to calculate rental property cash flow is one of the basics of real estate investing. At the end of the day, your goal from investing in real estate is to find the most profitable investments with positive cash flow.

Investing in rentals without knowing how to calculate cash flow is a trap that many investors fall in. But why is it so important to know what rental property cash flow is and how to calculate it? Simply because cash flow is the money you get to keep in your pocket after deducting all expenses. In other words, it is how you build your wealth in real estate.

The Definition

The cash flow is the difference between the gross rental income and rental property expenses. The cash flow projection of a real estate investment is called pro forma cash flow. This projection allows real estate investors to evaluate the overall cash flow of a property for a defined period in the future. In this blog, we will show you how to calculate rental property cash flow for a single year. A pro forma cash flow can be then based on this value.

To better understand how the final cash flow is calculated, we can divide it into 3 groups: cash flow from operations, cash flow after financing, and cash flow after taxes.

The final calculation leads to three results:

1- A negative cash flow or negatively geared rental property: Investing in such properties is not favorable but there are methods where you can turn a negative cash flow property into a positive one.

2- A neutrally geared property: This situation means that the investment property is neither making nor losing money.

3- A positive cash flow property: The optimal situation, meaning that you can still keep some money after operating costs, financial costs, and taxes.

Let us see how to calculate a rental property cash flow step by step.

How to Calculate Cash Flow on Rental Property

1- Calculating cash flow from operations

The first step of calculating your final cash flow is to determine the net operating income. NOI includes day to day operating expenses such as vacancy costs, management costs, property taxes, property insurance, property maintenance, and other costs which can include a business or short term rental permit, for example.

To calculate the net operating income, you simply have to subtract all these costs from the gross rental income, which is the amount of money your tenants pay.

For example, a real estate property that is rented out for $1,700 has a gross rental income of $1,700. If we assume that the monthly operating expenses are as follows:

5% vacancy cost: $85
10% management cost: $170
Property taxes: $2000/year or $167/month
Property insurance: $85
Property maintenance: $60
Short term rental permit: $10

Net Operating Income = Gross Rental Income – Operating Expenses

= $1,700 – $85 – $170 – $167 – $85 – $60 – $10 = $1,123

The final step before calculating cash flow from operations is to deduct capital expenditures (CapEx). CapEx includes large expenses that do not reoccur regularly like changing the roof or cooling system. Setting aside 5% of your gross rental income for CapEx is a good way to avoid rental property cash flow disasters.

Cash Flow from Operations = NOI – CapEx

= $1,123 – $85 = $1,038

2- Calculating cash flow after financing

Most real estate investors use borrowed money to invest in rental properties. That is why it is important to calculate your cash flow after financing to ensure you still have money to pay your mortgage lender.

Let’s assume that the asking price for the property is $150,000. After paying 20% as a down payment, you finance the rest at 3% for 30 years. You can use an online mortgage calculator to calculate how much you have to pay every month. In this case, the monthly mortgage payment is $600.

Cash Flow After Financing = Cash Flow From Operations – Financing Costs

= $1,038 – $600 = $438

This is the amount of money that you can keep in your bank account. But is it all yours? Well not really, you still have to pay your income tax bill. Depending on where your property is located, you will have to deduct a predetermined amount (cash flow after taxes).

How to Determine If a Rental Property Will Cash Flow Positively

How to find positive rental property cash flow

Normally speaking, there are signs for a positive rental property cash flow. An investment property located in a good neighborhood will usually yield a positive cash flow. These signs can be seen clearly when using a real estate investing tool like the heatmap analysis tool from Mashvisor. Based on investment properties in a given area, the tool can tell you which neighborhoods offer better cash flow.

Furthermore, a cash flow analysis, like the example above, is a must for each and every rental property investment. By failing to conduct one, you risk losing your property, especially when you don’t project the cash flow accurately.

Many investors find cash flow spreadsheets complicated and sometimes confusing. Mashvisor has the solution to that problem. The rental property cash flow calculator saves you the trouble of manually calculating your cash flow. Based on similar properties in the same location, this tool will provide you with an accurate calculation.

How Much Cash Flow Is Good for Rental Property?

It is 100% correct to say that the more cash flow you get on your property the more profitable the investment is. However, since rental property cash flow is a value, it is difficult to say what is a good cash flow rental property.

A good rental property cash flow is, therefore, any positive cash flow you can make out of your rental property. The more, the better.

Together with other investment analysis metrics such as the cash on cash return and cap rate, cash flow can be used to compare different investment opportunities. Understanding the meaning of these metrics and learning how to calculate them is a must when it comes to investing in rental properties.

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