How Do you Calculate Cash Flow?
If you are thinking about purchasing a property, then calculating the cash flow of the rental property is one of the first things you should do! So many people only think about collecting the rent check and income that comes with owning an investment property. But it’s equally, if not more important to calculate all the expenses that go into owning the property.
Rental Property Cash Flow Equation
Rental Income – Expenses = Net Profit (or Loss)
How to Calculate Rental Property Income
Calculating the income side of the cash flow equation is relatively easy. Unfortunately, there are far fewer ways to bring income into a property than to expend it. For the most part your income will be reliant on the amount of rent you can charge a tenant for the property each month.
Not sure what price to charge tenants for rent for your property? Check out a recent post we dedicated to the topic: How to Determine the Most Profitable Rental Rate
How to Calculate Rental Property Expenses
The next important factor is to take a look at your property expenses. You can then calculate a rough estimate of the total cost of owning the property each month. If you are not sure what type of expenses to account for check out this post: Complete Must Have List of Rental Property Expenses.
Finally you’ll subtract your expenses from your rental income to find your net monthly cash flow.
Hopefully once you subtract your expenses from your expected rental income you will find that your cash flow is positive for the month. If it’s not, then this isn’t a profitable property to purchase and you should keep looking for other opportunities. If you have already purchased the property, try to determine if there are any expenses that you can eliminate. For example you might be able to take on the lawn care, property management or renegotiating some terms after a tenant’s contract expires.
Other Considerations
If you are searching for a property to buy do not be discouraged if the cash flow is negative. It is important to know that you have done your due diligence and there will be better opportunities out there. It’s easy to get attached to a property but if it doesn’t make sense financially you have to walk away. It’s important to take your time and find the property that makes sense for you.
There are a few other things to consider besides cash flow when purchasing a rental property. The condition of the property should also be considered and if a tenant can move in immediately or if the property needs additional renovation. If you need to improve the property make sure to budget additional money upfront for renovations. And as always try to leave some wiggle room if you have to carry a property without rent for awhile until you find a tenant.
Until next time, happy investing!
P.S. – Interested in managing your own properties? Make sure to check out these articles for helpful tips!
