In real estate investing, cash flow refers to the amount of money that is generated from a rental property after expenses have been paid.
Positive cash flow occurs when the property generates more income than expenses, resulting in a profit for the investor. Negative cash flow occurs when expenses exceed income, resulting in a loss for the investor.
Cash flow is important in real estate investing because it can help to determine the overall profitability of a property. If a property generates positive cash flow, it can provide a reliable source of income for the investor.
On the other hand, if a property generates negative cash flow, it can be a financial drain on the investor and may not be a viable long-term investment. Additionally, cash flow is an important consideration when it comes to evaluating the risk associated with a real estate investment.
Properties with strong cash flow are generally considered to be lower risk, as they are more likely to generate a positive return on investment. In contrast, properties with weak cash flow may be more risky, as they may be more prone to financial problems if expenses exceed income.
To calculate cash flow in real estate investing, you will need to subtract your expenses from your income. Here is the formula:
Cash flow = Gross rental income – Expenses
To calculate your gross rental income, simply add up all the rental income you receive from the property over a given period of time, such as a month or a year. To calculate your expenses, include all the costs associated with owning and operating the property, such as mortgage payments, property taxes, insurance, utilities, maintenance, and repairs.
Here is an example:
Gross rental income: $1,200 per month
- Mortgage payment: $800 per month
- Property taxes: $100 per month
- Insurance: $50 per month
- Utilities: $100 per month
- Maintenance and repairs: $100 per month
Total expenses: $1,150 per month
Cash flow: $1,200 – $1,150 = $50 per month
In this example, the property generates a positive cash flow of $50 per month.
It’s important to note that this is just a basic formula, and there may be other factors to consider when calculating cash flow, such as vacancy rates and capital expenditures.
Here are a few ways to increase cash flow on your rental properties:
- Increase rent: If market conditions allow, consider increasing the rent on your property to increase your cash flow.
- Reduce expenses: Look for ways to reduce expenses related to your rental property, such as by negotiating lower rates with suppliers or vendors, or by implementing energy-efficient measures to reduce utility costs.
- Rent to multiple tenants: Consider renting out individual rooms or spaces within your property to multiple tenants, rather than renting the entire property to one individual or family. This can allow you to generate income from a single property by renting to multiple parties.
- Offer additional services: Consider offering additional services or amenities to your tenants for an additional fee, such as a cleaning service or access to a pool or gym.
- Rent out the property short-term: If your property is located in a popular vacation destination, consider renting it out on a short-term basis through a platform like Airbnb. This can allow you to generate higher rents by catering to travellers, rather than long-term tenants.
Cash flow is an important consideration for real estate investors, as it can help to determine the overall profitability of a property and the investor’s ability to cover expenses and generate a return on their investment. Factors that can impact cash flow include the rent being charged, the cost of maintenance and repairs, and the overall condition of the property.