Free Rental Property Cash Flow Analysis
An essential concept aspiring landlords and real estate investors need to grasp before diving into rental real estate is how to calculate rental property cash flow. After all, cash flow is the lifeline of a rental real estate business. Luckily, calculating cash flow is easier than you might think.
What is cash flow?
When you hear real estate investors use the phrase “mailbox money,” they are referring to cash flow.
Cash flow = passive income. It’s the income generated when your rental returns exceed your monthly expenses. Meaning it’s income you bring in monthly that doesn’t require a lot of your active working hours, like a typical 9-5 job.
Cash flow is one of the most popular rental property ROI calculations.
Cash Flow= total income – total expenses
When you’re looking for a potential investment property, you want to make sure you do your due diligence when researching how much cash flow a property will generate.
When looking at a real estate investment, there are two main components you need to fully understand and be able to forecast: income and expenses.
Understanding the key financials of a property allows you to understand exactly what cash flow is.
To elaborate on this, real estate investors look for rental properties with positive cash flow returns, or, in other words, they invest in positive cash flow properties.
How to calculate cash flow
Calculating a rental property’s cash flow is a relatively simple process:
- Determine the gross income from the property.
- Deduct all expenses relating to the property.
- Subtract any debt service relating to the property.
- The difference is the property’s cash flow.
Let’s take a look at what goes into total income and total expenses below.
The total income will generally be the same as the total rent.
There are some cases where you are receiving income from application fees and laundry. But it’s generally safe to assume that total rent is equal to total income.
The gross rental income of a property is the total income from all sources before any expenses or mortgage payments are made. Some properties, like a single-family rental, will only have one source of income, the rental income. There are some cases where you are receiving income, from things like, application fees, laundry, late fees, pet fees, or product sales like boxes or moving supplies.
There are plenty of expenses that you want to take into account.
A few examples of potential expenses you should be thinking about:
- Snow Removal
- Property management
How much rental cash flow should you aim to earn?
Every investor has different financial goals. Some are happy with an 10% return on investment (ROI) while others seek an ROI of 25% or more. There is no magic number that is the perfect or right amount of cash flow to earn. It’s common, after reviewing your financial goals, to establish a minimum cash flow per door or a minimum return requirement. When you’re evaluating properties, this can help guide you in eliminating any that do not meet your standards for investing.
Calculating cash flow using the 50% rule
The rule says that you should estimate your operating expenses to be 50% of your rental income.
If a rental property makes $100,000 per year in gross rental income, you should assume that half, or $50,000 will go towards expenses.
Therefore, the 50 percent rule is a good tool to use to quickly analyze a rental property, but should never take the place of a thorough analysis of a property. Think of the 50 percent rule as a “quick filter” that allows you to estimate cash flow in under a minute, enabling you to analyze dozens of properties while looking for a deal with potential that you can run a more thorough analysis later on.
According to a popular saying in real estate investing, cash flow is king. Having sufficient cash flow is essential in keeping your real estate business afloat. Investing in rental properties with positive cash flow should be the goal for every investor, and the more cash flow you earn from each property, the bigger safety net you’ll have, and the more income you can earn.
Finding a positive cash-flowing property isn’t always easy, but if you know how to accurately calculate rental property cash flow, you can have peace of mind knowing you’re evaluating properties carefully and increasing the likelihood of buying a worthwhile investment.