In the world of real estate investing, understanding the money side of your business is crucial. To figure out how profitable your rental properties are, you need to get a handle on something called "rental property cash flow analysis."
Let's break it down and see how you can calculate cash flow and make your rental properties more profitable.
What Is Rental Property Cash Flow Analysis?
Cash flow analysis is like looking at the money flowing in and out of your rental property. It's essential because it helps you figure out if your property is making or losing money. You want to look at this over several months to see the bigger picture.
For example, it helps you account for times when your property is empty or needs repairs. By analyzing the cash flow, you can see all the costs involved in running the property and how much money it can make.
Understanding Cash Flow
Cash flow is simply the difference between the money your rental property brings in and the money it costs to run it. This includes things like your mortgage, property taxes, insurance, repairs, and more.
When your rental income is higher than your expenses, you've got positive cash flow, which is great. But if your expenses are more than what you make in rent, you've got negative cash flow, which isn't good.
How to Calculate Rental Property Cash Flow
Calculating cash flow might seem easy, but it can get tricky. Here's the basic idea: you subtract your expenses from your rental income to get your cash flow.
Cash Flow = Total Income - Total Expenses
Sounds simple, right? So, why do people sometimes mess it up? Well, it's because those "total income" and "total expenses" parts can be pretty complicated. Let's break it down:
Step 1: Calculate Gross Cash Flow and Income
Before you can calculate cash flow, you need to know how much money your property is making. This includes not just rent but also things like application fees and laundry income. You have to add up all these sources of income to calculate your gross cash flow and income.
Step 2: Figure Out Gross Operating Expenses
This is where you look at all the money you have to spend to keep your rental property going. It includes things like taxes, mortgage payments, utilities, and maintenance costs. You need to count all possible expenses and even overestimate them a bit to be prepared for emergencies.
Step 3: Calculate Net Operating Income (NOI) Before Financing
Now, you take your income and subtract your operating expenses to get your net operating income (NOI). It's like the money your property makes before considering any financing or loans. This number is important because banks and lenders want to see it when you ask for a loan. You need to have enough NOI to take care of your property and still have some cash left over.
Step 4: Find Net Cash Flow After Mortgage Payments
Once you have a lender for your rental property, you can calculate your net cash flow after paying your mortgage. This tells you how much money you have left after covering all the property expenses. But you won't know this until you know your exact monthly mortgage payment.
Expenses That Affect Cash Flow
Running a rental property comes with lots of costs, and if you forget some of them, it can hurt your business. Here are some common expenses you should consider:
- Repairs
- Mortgage payments
- Mortgage insurance
- Vacancy rate
- Property taxes
- Utility bills
- Insurance (like flood or fire insurance)
- New appliances
- General maintenance and property management
- Homeowners' association fees
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- Office supplies and software
- Gas and mileage for property visits
- Payroll
Remember, not all these expenses happen every month, so you need to estimate them for the future. For example, you might not have vacancies now, but you should plan for one month of vacancy each year and include that in your calculations.
Average Cash Flow for a Rental Property
The typical cash flow for a rental property is usually around 7% to 8%. However, it can vary a lot depending on where your property is, how much it's worth, and other factors. Different investors have different ideas of what's good cash flow.
What's Considered Good Cash Flow?
Aiming for $100 to $200 in monthly cash flow per unit is a good goal. For a duplex, you'd want at least $200 per month; for a fourplex, $400 is a good target. This money is what you have left after paying all your bills.
But there's a catch. It depends on how much you invested. Imagine investing $1 million and making $100 a month – that doesn't sound great. But if you invested $500 and made $100 every month, that's an excellent return.
So, cash flow per unit is one metric, but it's not the only one. You also need to consider cash-on-cash return.
What's a Good Cash-On-Cash Return?
Cash-on-cash return tells you the percentage of your investment that you make back in cash flow in a year. For example, if you invested $1,000 and made $100 in profit in a year, that's a 10% return.
Most experts say you should aim for a cash-on-cash return of at least 12%, but it also depends on how much money you're making in total.
It's not just about the percentage; you want the actual profit to be worth your time and effort.
Other Useful Calculations
There are a few more calculations that can help you with your rental property cash flow analysis:
1. Capitalization Rate (Cap Rate): This helps you understand the risk of owning a property. You calculate it by dividing your net operating income by the current market value.
2. Cash Flow Return on Investment (ROI): It tells you how much cash flow your property will bring in compared to its value and investment cost. You can calculate it using specific formulas.
3. 50% Rule: This is a quick way to estimate cash flow. It assumes that about 50% of your income goes toward expenses, excluding your mortgage payments.
4. 1% Rule: This rule helps you figure out how much to charge for rent. Your monthly rent should be at least 1% of the property's purchase price.
Keep Your Cash Flow Fluid
Having all your money tied up in investments is great for your net worth, but it's not helpful if you can't access it quickly. Having a fluid cash flow means you can get money from your assets easily. This liquidity lets you take advantage of real estate opportunities as they come up. Rental income keeps money moving through your business, which is crucial for seizing opportunities.
Use the BiggerPockets Calculator BiggerPockets Rental Property Calculator
The BiggerPockets Rental Property Calculator is a handy tool to crunch all these numbers. It ensures accuracy and considers all potential expenses. By conducting a cash flow analysis, you're scrutinizing the numbers and ensuring the success of your real estate investment, which ultimately means making money.
Boosting Your Cash Flow
To increase your cash flow, you need to analyze it first. Always aim for positive cash flow – that's where the profit is. Here are some strategies to help:
1. Regular Maintenance: Keep up with property maintenance to attract tenants and increase property value.
2. Long-Term Tenants: Choose tenants who are likely to stay for a while to reduce vacancy rates.
3. Challenge Property Taxes: If your property taxes keep going up, consider appealing the increase.
4. Refinance Your Mortgage: Keep an eye on interest rates; refinancing your mortgage can lower your monthly costs and increase cash flow.
In conclusion, you now have the knowledge to calculate rental property cash flow for potential rental units. These formulas and insights should help you assess your investment's profitability comprehensively. If you need assistance with your real estate transactions or have questions about rental property cash flow analysis, don't hesitate to reach out to one of our agents.
