Cash flow – two words every investor should be focusing on to run a successful rental property. Whether the numbers are low or high, your cash flow determines your actions on each property and future investments.
What is cash flow? The profit or losses that change throughout time, depending on your expenses and values in a property. There are several considerations that affect a cash flow, including mortgage payments, HOA, taxes, etc.
Let’s look at the cash flow numbers you need to consider in a rental property:
1. Monthly income (gross income). Figuring out the current rent of tenants or setting a realistic rent value to advertise for property.
2. Calculate Monthly Expenses: There are several areas to consider when calculating monthly expenses: property taxes, property management fees, insurance, homeowner’s association fee (HOA), mortgage or financing, vacancy and daily/monthly/yearly repairs.
3. Do the Math. Now you need to gather all the expenses and get out the calculator. Subtract the Monthly Expenses from the Monthly Rent (= Net Income): and this is your monthly cash flow.
4. Do the Calculations on Returns: There are two valuable numbers to know on every property, the Cap Rate and the Cash-on-Cash Return.
A Cap Rate will give you a general idea if this is a good property to buy when comparing the ROI and purchase price. Here is how to calculate the return (without mortgage included):
Net Annual Income / Purchase Price = Cap Rate
A Cash-on-Cash Return is the number associated with how much return you receive on money invested, when financing a property. Here is how to calculate the return (with mortgage included):
Net Annual Income / Total Cash Invested = Cash-on-Cash Return
Once your numbers are in it’s time to determine whether this is a good deal or not. The RV ratio helps determine this, and when your RV is at 0.7% or higher, then you know things are going well with your investment.
As a reminder, it’s always best to write down each expense as it occurs, then at the end of each month go over these numbers to ensure you have accurate results and a positive cash flow.
