Need to Know: Rental Property Cash Flow
When you’re ready to dive into the world of real estate rental property, one of the first things you should learn is how to calculate the cash flow for your rental property. Having good cash flow for your rental property can allow you to purchase more properties, growing your rental property investment portfolio. Being able to calculate your cash flow can also help you avoid investing in properties that will eat away at your net profits.
What is cash flow?
Cash flow is essentially the difference between the rental property’s income and expenses, including any debts. You can calculate cash flow for properties that produce revenue, such as rental homes, duplexes, apartment complexes, and commercial buildings. Having positive cash flow means that you’re bringing in more money than you’re spending on expenses and financing costs. Negative cash flow is when you’re spending more money each month on expenses, losing you money. Having positive cash flow will allow you to put aside money so you can have a safety net for any unexpected expenses - like a new roof or fixing a burst pipe.
How to calculate cash flow
When you’re looking to calculate the cash flow on your rental property, it’s pretty easy.
- Determine the total income of the property
- Subtract any expenses for the property
- Deduct any debts that the property has
- The difference between them is your cash flow
The total income of the property is generally just the rent payments, plus any application fees or pet fees. The expenses can be anything that needs to be paid to maintain the rental property, such as property taxes, utilities, maintenance and other miscellaneous fees. The difference is your Net Operating Income (NOI), which doesn’t account for debts. If there is debt on the property, such as a mortgage payment, that’s subtracted after the expenses so that you can see the cash flow after financing.
If you want to calculate cash flow on a rental property quickly, you can use the 1% rule. This is a formula used to see if a property would likely have positive cash flow, where the property’s rental rate should be 1% of the purchase price. For example, if the property is listed for sale at $150,000, it should yield a rental income of $1,500 or more per month.
How much cash flow should you try to earn?
While the sky's the limit for how much you can earn on a rental property, real estate investors should aim for the return on investment that’s best for them. Some investors are fine with a 9% ROI, while others are trying to make 15% or more. There isn’t a set number, but once you understand your investment goals, it should be easy to calculate how much of a return you’re wanting to get.
Calculating your rental property’s cash flow can sometimes be difficult, and when you need expert advice, contact Renovo and talk to one of our team members to discuss how you can continue to grow your rental investment portfolio despite the current market.