Cash flow is one of the most critical metrics for real estate investors. It's the net amount of money being transferred into and out of a business or investment. In a residential investment property, cash flow refers to the income that remains after all expenses have been paid.
Cash flow is typically calculated monthly and determined by subtracting your monthly expenses from your monthly rental income.
Here's a basic formula:
Cash Flow = Gross Rental Income - Operating Expenses - Debt Service
In this formula:
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Gross Rental Income is the monthly rent you collect from your tenants.
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Operating Expenses include property taxes, insurance, maintenance and repairs, property management fees, and more.
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Debt Service is your monthly mortgage payment if you have one.
So, if you collect $3,000 in rent each month, have operating expenses of $1,000, and a mortgage payment of $1,200, your monthly cash flow would be $800 ($3,000 - $1,000 - $1,200).
Positive cash flow indicates that the property generates more income than it costs to own and operate, making it a potentially good investment. Negative cash flow, on the other hand, indicates that you're spending more to own and operate the property than you're earning in rental income. While negative cash flow is generally undesirable, some investors are willing to accept it temporarily if they believe the property will appreciate over time or if they can increase rents in the future.
Factors like vacancies and unexpected repairs can also impact cash flow, so it's essential to maintain a cash reserve and regularly reassess your cash flow situation. The more accurate your rental income and expenses estimates, the more accurate your cash flow calculations will be.
Next UP ... Capitalization Rate (Cap Rate).