How to Calculate Cash Flow for Your Rental Property
Cash flow is any income generated when the returns on your rental investment are higher than the monthly expenses. When you want to calculate your rental property’s return on investment, the first thing you should do is calculate cash flow.
Real estate investors know that one of the first things you should do when buying a rental property is to research the potential cash flow by performing a financial analysis.
Calculate cash flow
To calculate cash flow for your rental property:
- Find out what the total income for the property is
- Subtract all expenses that relate to the rental property
- Deduct debt services for the property
- The difference between the income and expenses is the property’s cash flow
Generally, the total gross income is the rent that is paid by your tenants. If you have multi-family housing, you might have additional income from communal laundry facilities, application fees, etc.
Expenses for a rental property can vary, but the major ones include:
- Municipality Fees (water, sewage, garbage)
Increase cash flow
Increase rent / Long-term tenants
The easiest and quickest way to increase your cash flow for your rental property is to raise the rent when it’s time to sign a new lease or renew an existing one for your long-term tenants. By upgrading things around the home, like new appliances, you’re able to justify to your tenants the rent increase.
However, if you raise the rent too much continually, you have the potential of losing your long-term tenant. Losing a long-term tenant opens you up to high turnover rates and vacancies - which are two of the biggest cash flow inhibitors because you can go months without income.
Not doing preventative maintenance on the property can put you in a situation where you need to make major repairs. Preventive maintenance includes things like trimming the trees on the property, replacing air filters on your HVAC system, and cleaning out the gutters seasonally. By not doing preventative maintenance on the rental property, you may be dipping into your profits for repairs, making it harder for growing cash flow.
Appeal Property Taxes / Refinance the property
Municipalities can make property taxes go up each year. If the increase on the property taxes are going up faster than you can raise the rent, this presents a serious cash flow problem. Checking in with the municipality’s budget when it gets approved can help keep you informed so you’re not surprised when the taxes increase. Depending on your market, you may be able to make the case to the municipality to appeal the taxes and have them lowered.
Right now, mortgage rates are at an all-time low. It’s highly suggested to refinance the mortgage to lower your monthly payments, which will increase your profits.
When you’re ready to calculate your rental property’s cash flow and grow it, contact Renovo and talk to one of our team members to discuss how you can continue to grow your rental property investment portfolio in the midst of a changing market.