Understanding cash flow is an important aspect of investing in real estate. Learn how to calculate rental property cash flow today.
Investors have certain things that they follow for each of their assets to make sure they are still providing a benefit. One of the most important when it comes to their rental property is cash flow.
If you are just starting out, you may be trying to determine just how much cash flow you should have or intend to have with your investment properties. A lot of investors look for those properties that will bring in 1% to 2% of the purchase price every month. This may sound ideal, but the truth is, there are so many factors that come into play here so it is nearly impossible to predict your cash flow without taking them into consideration.
So, what is the right amount of cash flow you can expect? What is cash flow? How can it be calculated? And, what should you be looking for in an investment? We are going to touch on all of these and more.
For rental property investors, cash flow can be defined as the amount of money that a property is creating after expenses. It is, in other words, your profit. You will have expenses that need to be paid for running your rental property, but you will also (hopefully) earn an income from it. Having the right balance will create your cash flow.
There are two types of cash flow: gross cash flow and net cash flow. How are they different? Well, gross cash flow refers to any income generated off the property. This includes rent, application fees, late fees, etc.
Net cash flow is the money left over after all the bills are paid. Keep in mind that you will want to deduct things such as maintenance, taxes, insurance, marketing, utilities, property management fees, and the like.
If you deduct expenses from gross cash flow, you get net cash flow. You, of course, want this number to always be positive – this shows you have the right balance between income and expenses. Unfortunately, when major repairs come up or you are dealing with a vacant rental, this could fall into a negative – meaning you have a negative cash flow, spending more than you are bringing in.
To get a true idea of your cash flow, you have to be honest about what you have coming in and what you have going out.
As with any type of cash flow, there are always going to be factors that impact just how much you make and how great your expenses are. The same holds true for rental property cash flow. Below are a few of the biggest factors that play a role in determining your level of cash flow.
The locations of your property will play a role in your cash flow. In fact, it may play a significant role. See, the market where it is located sets the bar for the rent that you can charge. You can’t maintain a rental property in an area that rents for a comparable unit of $1,000.00 and decide you want to charge $3,000.00. It doesn’t work that way. Sure, in an imaginary world, that would greatly increase your income, but, in reality, you are going to have a vacancy until you lower the rent.
Further, you will want to consider property taxes, insurance rates, and even HOA fees if they apply. All of this is why location is such a big factor.
If you take out a mortgage on a rental property, you will have an interest rate and mortgage insurance to worry about it. These can both influence your cash flow. Depending on your credit history, credit score, down payment, and the price you are willing to borrow, you may end up with the ability to have more or less cash flow. For example, low credit scores and a low down payment can lead to bigger mortgage payments every month and higher interest rates. This will decrease your cash flow.
Depending on the size of the rental and whether you want to rent it long-term or short-term will impact your income and, ultimately, your cash flow.
Increasing cash flow is the ultimate goal, isn’t it? You want to bring in more money than you are spending so you can feel successful at what you do. If you find yourself with a lower cash flow than you had imagined, there are a few things you can do that may help. These include:
Having vacancies will kill your cash flow as you have nothing coming in. But you don’t want to just settle for any tenants, you want good tenants. Otherwise, you may find yourself dealing with missed rent payments, legal fees, major repairs to damage in the unit, and more.
While the local market is going to ultimately dictate the rent amount, adding value to your property allows you to be able to charge on the higher end of those market rents. This can include updated fixtures, landscaping, new paint or flooring, kitchen appliance upgrades, and more.
Not keeping up with regular routine maintenance can cause you to have to shell out more money for major repairs. Keep up with them as you go and you will save yourself some money.
Perhaps one of the best things you can do to positively impact your cash flow is to hire a property management company. These professionals know how to handle all these things that increase your cash flow, such as helping you find the best tenants while reducing your vacancy rate, as well as staying on top of repairs and routine maintenance. They also have vendors and connections within their network that handle these things. That means they have better rates to get the work done which means less expense to you.
At Real Property Management Evolve in Phoenix, we understand the importance of maintaining a healthy cash flow – and we strive to maintain your property in a way that helps you increase your earnings.