Is your rental property generating enough cash flow to cover your recurring expenses? Find out using a rental property cash flow calculator.
Table of Contents
- How Do You Calculate if a Rental Property Is a Good Investment?
- What Is a Cash Flow in Real Estate?
- What Is a Good Cash Flow for Rental Investments?
- What Is the Best Cash Flow Calculator Available?
One of the important benefits of real estate investing, especially in rental properties, is the ability to generate cash flow. As a real estate investor, you should know how your investment properties perform by regularly reviewing your income, expenses, liabilities, and cash flow. The said figures provide you with a general overview of your investment’s profitability.
Knowing how much cash flow an income property generates is a pivotal aspect of real estate investing. It helps ensure that your earnings can cover your operating expenses and payables. It would be easy to see how much return your investment is earning and whether or not it is generating profits or suffering losses.
However, manually calculating cash flow in Excel or other spreadsheet applications may not be simple, especially if more than one investment property is involved. Thankfully, you can rely on a rental property cash flow calculator, which is typically available online, to help make the process a lot easier.
To find the best calculator for cash flow computation, you should know what your business needs. Also, you should determine which essential aspects of cash flow calculators you should prioritize.
The good news is that you don’t need to look any further to find one. Mashvisor provides an efficient investment property calculator, which allows you to customize your expenses so you can get a more accurate and personalized computation. You no longer need to boot up Excel or other applications.
How Do You Calculate if a Rental Property Is a Good Investment?
When finding an investment property to be used as either long term or short term rental, it’s essential to know all the metrics you need to evaluate to measure its potential profitability.
In general, a good investment property should be in a good location that is strategically situated based on your preferred investment plan. However, location is not the only factor that can determine a property’s profitability. In fact, you should check the numbers first before you decide which rental property to buy.
Metrics to Consider When Measuring a Property’s Profitability
In order to find out if a rental property will make a good investment or not, you should calculate the following:
- Monthly Rental Income: This is the estimated income you can generate per month based on comparable properties in the same location.
- Monthly Expenses: These are the recurring expenses that you need to pay for each month, such as utilities, property management fees, and mortgage, as well as the prorated taxes and insurance premiums.
- Cash on Cash (CoC) Return: This refers to the ratio of the total cash that you can earn on the total cash invested on a rental property. This metric considers only the amount you invested in actual cash, notwithstanding the amount you borrowed from a loan.
- Cap Rate: This measures the ratio of the net operating income to the property’s value. This metric doesn’t consider the financing methods used to purchase the property. It only takes into account the property’s current market value.
- Cash Flow: In real estate, cash flow is the amount of money you have left from your income after deducting all the expenses. A positive cash flow means that you have more money left as a profit. On the other hand, a negative cash flow indicates that what you earned does not cover the cost of operating a rental property, resulting in a loss.
- Occupancy Rate: This refers to the number of days your property is rented in a year versus the number of days it is listed for rent. A high occupancy rate is what every rental property owner desires, as it indicates that the property generates cash flow. When the property is vacant, it does not generate an income, but you still need to pay for its upkeep.
What Is the 2% Rule in Real Estate?
Some experts believe that to become a profitable real estate investor, you should keep the 2% rule in mind when looking for a rental property to buy. The 2% rule states that for a property to be considered a good investment, it should generate a rental income equal to 2% of the property’s purchase price.
For example, if the property’s purchase price is $250,000, your rental rate should be at least $5,000. However, this amount is typically unrealistic. In real estate markets where the median property price is low, the rent is also expected to be low. On the other hand, even in expensive markets like the big cities in California, the 2% rule is still not feasible.
Nowadays, the 2% rule is being discredited in most US real estate markets. After all, the rental rates are dictated by several external factors, including the demand for rentals and your additional amenities. While you can increase the value of your property by investing in improvements and amenities, it’s still almost impossible to meet the 2% rule in most cases.
The good news is that the 2% rule is not set in stone. While this figure is the ideal income to generate more than enough cash flow, it doesn’t mean that properties that don’t meet the rule will not make a good investment.
To identify potentially profitable properties, it’s best to analyze their cash on cash returns and cap rates. Generally, a cash on cash return of 8% to 12% is ideal. However, in some markets where home values appreciate quickly, a cash on cash return of at least 2% is considered good.
In the next section, we will discuss what cash flow is and how it can affect your investment.
What Is a Cash Flow in Real Estate?
Cash flow refers to the inflow and outflow of cash or cash equivalents in a real estate business. A positive cash flow is the net amount of money an income property generates after paying its expenses and other liabilities. To calculate cash flow in real estate, it’s best to use a rental property cash flow calculator to get accurate results.
There are three kinds of cash flow that you should understand in real estate investing: free cash flow, discounted cash flow, and operating cash flow. We will discuss each of these types in the next sections to know what they are and how they work.
What Is Free Cash Flow?
Free cash flow (FCF) is the cash or cash equivalents generated from an income property after paying operating and capital expenditures.
For instance, you pay for expenses like property management fees, taxes, repairs and maintenance, insurance, utilities, HOA dues, mortgage, and other fees. The money left after paying these expenses is your free cash flow, which you can use as you please.
Free cash flow is an essential metric that shows whether or not an income property is efficient in generating cash. It’s critical to know how to calculate and analyze your free cash flow to help with your cash management.
Being able to determine your free cash flow using a cash flow calculator can help you make informed business decisions. The more free cash flow you have, the quicker you can pay down your debts and build your investment portfolio.
How to Calculate Free Cash Flow in Real Estate
With a free cash flow calculator, it would be easy to calculate the free cash flow generated from an income property. You can also manually do the calculation using the following formula:
Free Cash Flow = Net Operating Profit After Taxes − Net Investment in Operating Capital
You can use the following formulas to compute the net operating profit after taxes (NOPAT) and operating income:
Net Operating Profit After Taxes = Operating Income × (1 − Tax Rate)
Operating Income = Gross Profits − Operating Expenses
What Is Discounted Cash Flow?
Discounted cash flow (DCF) is a valuation method that uses an investment property’s expected future cash flows to estimate its value.
A discounted cash flow analysis aims to determine the current value of an investment property based on its future cash flow projections that are discounted for risk. Property owners typically use the discounted cash flow value if they plan to sell their income property or make investment decisions, such as capital budgeting.
Income properties with riskier cash flow streams are typically discounted at higher rates. If your rental property investment can generate more certain cash flows in the future, they are discounted at lower rates. Prospective real estate investors buying an investment property can also use the discounted cash flow analysis to get an overview of the accurate value of an asset.
How to Calculate Discounted Cash Flow in Real Estate
When calculating the discounted cash flow, it’s recommended to use a discounted cash flow calculator to get a precise value. You can also do it yourself through the following steps:
- Forecast cash flow: Determine the expected future cash flows from the investment.
- Select a discount rate: Determine the discount rate based on the cost of financing, risks, and other opportunity costs.
- Calculate the discounted cash flow: Discount the forecasted cash flows using a cash flow calculator, a spreadsheet, or manual calculation.
The formula for discounted cash flow is as follows:
Discounted Cash Flow = CF1 / (1 + r1) + CF2 / (1 + r2) + CF3 / (1 + r3)
Where:
- CF refers to the cash flow for the given year (for example, CF1 is for the first year, CF2 is for the second year, and so on), and r is the discount rate for the corresponding year.
What Is Operating Cash Flow?
Operating cash flow (OCF) refers to the amount of cash or cash equivalents generated by an income property based on its normal business operations.
Investors use the operating cash flow analysis to determine whether a rental property can generate an adequate positive cash flow to maintain its operations. A negative cash flow means investors need external funding to support the property’s business activities.
Operating cash flow focuses on the cash inflows and outflows related to a rental property’s major operating activities. It includes rental income, property management fees, maintenance costs, utilities, and association dues. Investing and financing transactions are not part of the operating cash flow analysis, such as mortgages and buying appliances.
How to Calculate Operating Cash Flow in Real Estate
You can use an operating cash flow calculator to compute the operating cash flow of a rental property. However, you can also do it by subtracting the actual cash outflows from the cash inflows, which is the direct method of calculating OCF. Note that you should not include your mortgage payment and any capital expenditures.
The operating cash flow formula is:
Operating Cash Flow = Total Cash Received – Cash Paid For Operating Expenses
What Is a Good Cash Flow for Rental Investments?
If you want to determine whether an income property for sale is worth investing in, you should first find out how much net cash flow it generates.
In general, a positive cash flow (after deducting all expenses and liabilities, including possible vacancies) is considered good. The bigger the positive cash flow a rental investment property can generate, the better for the investor. However, different investors have varied opinions on what makes a rental cash flow good.
You can look at the projected return on investment (ROI) from a rental property to determine whether its cash flow is sufficient. The average ROI of a good investment property is around 8%. But if you want to be really profitable, it’s best to aim for higher returns, typically around 10% to 15%, or even more.
Another way to determine the profitability of an investment property is to consider its cash on cash return or a cap rate. Both metrics can help you decide if the rental property generates adequate cash flow. You may also use a cash flow calculator to determine the values for the metrics.
Cash Flow Based on Return on Investment (ROI)
The return on investment shows how much profit you earn from a rental property versus the capital you invested. To compute the ROI of an investment property, you need to divide the net cash flow by the property cost. You can use the following formula to calculate the ROI:
Return on Investment (%) = (Net Cash Flow / Property Cost) × 100
For example, a rental property that costs $200,000 generates an annual net cash flow of $20,000. You can use an annual cash flow calculator to determine your net yearly cash flow.
Using the above formula, we compute the return on investment as follows:
ROI = ($20,000 / $200,000) x 100 = 10%
It means the ROI of our sample rental property is 10%. Depending on the rental strategy used, most investors are happy with a 6% to 8% return. If the ROI of a particular rental property falls around 6% or 8%, the cash flow generated from the property is considered good. Of course, the higher the ROI, the better.
Cash Flow Based on Cash on Cash Return (CoC)
The cash on cash return is an important metric that compares the net profit generated from an investment property versus the amount of money invested. If you purchased the property through a mortgage, you only need to take into account the actual cash you invested (not loaned). It includes the down payment and the closing costs if you pay them in cash.
Note that we do not use the total property cost to compute the CoC return. Here is the formula for calculating the cash on cash return:
Cash on Cash Return (%) = (Net Cash Flow / Cash Invested) × 100
For instance, if you make a down payment of $30,000 on a rental property that makes a net cash flow of $4,000 per year, your CoC return is:
CoC = ($2,600 / $30,000) x 100 = 8.67%
In this case, the cash on cash return is 8.67%. What makes good cash on cash return depends on the property’s location, which varies per investor. Usually, most investors consider good cash on cash return to be 8% or higher. However, in some cities with high appreciation rates, cash on cash returns of between 2% and 4% are acceptable.
It’s important to note that cash on cash return at the property level should be at least 10% to be considered profitable. At the city level, however, a 2% to 4% cash on cash return is satisfactory. But as investors, it’s best to look for properties that can earn at least 10% CoC return to ensure good cash flows and maximum profitability.
Understanding the 1% Rule
Some investors use the 1% rule to identify properties that will make profitable investments. The 1% rule is a quick way to check if a rental property will generate a positive cash flow, especially if the expenses on the property are not available. The said rule is quite simple, and it helps you determine the best rent estimate for a rental property to make it a worthwhile investment.
According to the rule, you should be able to rent a property for at least 1% of the purchase price and all the repair and improvement costs you‘ve spent. If the current rental income a property generates is less than 1%, it means it doesn’t provide enough cash flow to make it a good investment.
Let’s say you’re considering a property with a selling price of $120,000. Based on the 1% rule, the monthly rental income should be at least $1,200. Anything less than the said amount means the investment property is not worth your time and money. If you choose to use the rule, you won’t need a cash flow calculator rental to determine if a property is worth investing in.
Compared to the 2% rule, the 1% rule is more achievable, and it also assures a good cash flow. If you are looking at a rental property worth $150,000, and historically, it generates a monthly rent of $2,000, the property passed the 1% rule.
However, if the property you like to buy is worth $200,000, and its average monthly rent is only $1,700, it means that the property did not pass the 1% rule. If you want to ensure your profitability, it’s best to find another option instead.
What Is the Best Cash Flow Calculator Available?
The best rental property cash flow calculator should accurately calculate the cash flow from a rental property based on its expected income and expenses. However, while several cash flow calculators are available online, not all can provide accurate estimates of a property’s financials. Keep in mind that accurate figures are essential if you want to get accurate results.
Some online cash flow calculators only allow you to calculate the property’s cash flow. Still, you should be the one to input the necessary figures, including the property’s income and expenses. It requires manual research on your part, which can be exhausting and time-consuming.
The best way to calculate cash flow using an online rental calculator is to obtain an in-depth overview of a rental property’s financial information already provided. It allows you to compute the property’s cash flow right away without doing manual research on the property’s financials.
The best news is that this is made possible with Mashvisor’s rental property calculator.
Why You Should Use Mashvisor’s Cash Flow Calculator
The best thing about Mashvisor’s rental property calculator is that it does not only compute cash flow. It is an all-in-one real estate investment calculator that provides investors with the figures they need to make an informed investment decision.
Mashvisor can estimate the expected rental income, expenses, financing costs, and potential profit from a particular investment property. Knowing all this financial data is essential if you want to make a decision based on actual figures that allow you to see how the property is performing.
The best investment property cash flow calculator should help you decide whether a specific rental property is worth investing in. If you use Mashvisor’s income property calculator, you’ll be able to access the following essential features:
Property Search Feature
Mashvisor does not only provide an investment calculator—it offers a database that lets you search for a potential investment property. Its unique algorithm allows you to search for a property using custom filters like location, budget, rental income, number of bedrooms, and more.
Long Term and Short Term Rental Analytics
Mashvisor provides comprehensive analytics for both long term and short term rentals to show side-by-side the best rental strategy for a particular property. In addition, Mashvisor’s short term rental calculator can estimate how much income you can earn, considering the occupancy rate, financing method, and expected expenses.
What’s more, you can edit the expenses to get more accurate results. For example, if you plan to spend more for improvement, you can add that expense to the calculation. If you don’t intend to hire a property manager to manage your property, you can remove the property management fee from the list of expenses if there is one.
Real Estate Comps
Besides rental strategy, Mashvisor also provides auto-generated real estate comps for long term and short term listings. It allows you to compare similar properties and consider other listings. By analyzing the rental comps, you’ll know how your property will likely perform. Also, studying the rental comps can help you decide how much to charge for your rental property.
Accurate Estimates of Real Estate Data
Mashvisor’s in-depth research and analysis provide a comprehensive estimate of relevant data, such as rental income, expenses, and occupancy rate. This way, you do not need to do your own research to know how a property performs. This feature makes the lives of an investor so much easier because all the information you need is already available.
Investment Balance Payback Feature
Mashvisor also offers a feature that calculates ROI and presents the data to show how your investment will pay back in the future. The investment payback computation is based on your preferred financing method, and it shows balance payback for both long term and short term rental strategies.
Want to have first-hand experience with how Mashvisor’s all-in-one investment property calculator works? Start a free trial now.
Important Terms to Remember
To use Mashvisor’s rental property cash flow calculator effectively, you should first understand the important terms that you will likely encounter when investing in real estate. These terms include the following:
Rental Income
This refers to the amount of rent you will receive monthly from your tenants.
Monthly Expenses
The recurring expenses that you expect to pay monthly, including insurance, utilities, property management fees, tax, HOA dues, and maintenance fees.
One-time/Startup Costs
The one-time initial costs of an investment property. The one-time/startup cost typically refers to the loan closing cost, inspection cost, improvement cost, and cost of furniture and appliances.
Mortgage
This refers to a loan agreement used to purchase the property, and the borrower uses that property as collateral.
- Property Price: This is the selling price of the property listed on the platform.
- Down Payment: This is the initial payment for the purchase of the property. It is typically paid if the property is purchased through a loan.
- Loan Amount: This is the amount of money you owe a lender under a mortgage.
- Mortgage Type (Fixed-rate or Adjustable-rate): This is the type of mortgage you choose. A fixed-rate mortgage comes with a fixed interest rate for the entire loan term, regardless of market conditions. An adjustable-rate mortgage comes with a variable interest rate that may adjust periodically during the life of the loan based on market conditions.
- Loan Term/Duration: This is the period of the loan from the first amortization to the time you are expected to pay it off. The typical loan terms are 15 years and 30 years.
- Interest Rate: This is the rate of interest the lender charges on a mortgage.
Cash on Cash Return
The cash on cash return is the net profit generated from an investment property to the total cash investment. It varies depending on whether you purchase the property entirely in cash or with a mortgage loan. CoC returns only consider the amount you invested in cash—it does not include the amount you borrowed through a mortgage.
Cap Rate
Cap rate is the ratio of the net operating income to the property’s purchase price or the current market value. How you acquire the property, whether in cash or with a mortgage loan, will not change or affect the cap rate value.
Occupancy Rate
Occupancy rate is the ratio of the number of days or months for which a rental property gets rented over the total number of days it is available for renting.
How to Use Mashvisor’s Cash Flow Calculator
Mashvisor’s Cash Flow Calculator allows investors to put in the relevant metrics to calculate the return on investment from their investment property.
Using Mashvisor’s cash flow calculator is relatively easy, and it is recommended even if you are a beginner investor. The following steps will guide you through the simple process:
Step 1: Search for a Property
Using the investment property search tool, look for a rental property based on your chosen location and preference. You need to input the area of your choice (either city or neighborhood) to start your search. Mashvisor’s database contains tens of thousands of listings available for sale, making it easier for you to find the best investment property that meets your requirements.
You can also narrow your search by using custom filters, such as location, budget, property type, number of bedrooms, and number of bathrooms. Through the filters, you can conveniently customize the results so you won’t waste time scrolling through properties that don’t meet your criteria.
Step 2: Choose a Property From the Search Results
Mashvisor will then show a list of properties that match your search filters. Choose a property that interests you, click on it, and it will lead you to an in-depth real estate market analysis. You will see the property valuation analytics for long term and short term real estate strategies, including crucial data like rental income, cash flow, cap rate, and cash on cash return.
You will also see more information about the property characteristics, tax history, and even neighborhood analysis. The page contains valuable information that can ultimately help you make an informed investment decision. It’s best to carefully review the real estate data you find here to know whether or not the property will make a good investment.
Step 3: Choose a Financing Method
Mashvisor provides a mortgage calculator that allows you to overview your amortization and your average cash on cash return if you decide to buy the property through a mortgage. You can adjust your preferred term, mortgage type, and interest rate so you can get a more personalized computation based on your financing plans.
In addition, you’ll be able to access the investment payback balance table, which shows how long it will take to earn a return on investment based on your chosen financing method. You’ll see whether or not the rental property will generate sufficient income so you can realize an ROI soon enough.
Step 4: Add Your Custom Expenses
Mashvisor provides estimates of the primary expenses associated with the property, such as insurance, utilities, property management fees, taxes, cleaning fees, and HOA dues. If you think other costs are not included in the list, you can add your own figures and make the necessary adjustments to get a more personalized computation.
Step 5: Compare the Rental Strategies
You will see a side-by-side comparison of the property’s financials based on long term and short term rental strategies. Mashvisor’s cap rate calculator allows you to see which rental approach is best for the property based on your financing method, custom expenses, and market value.
By comparing rental strategies, you will get an overview of the possible returns you can earn if you rent out the property on a long term basis or as a short term rental. It tells you which investment strategy is optimal for that particular property so you can make an informed decision.
Step 6: Make a Decision
Once you’ve seen the financials of the property and its corresponding estimated returns, you can decide whether to pursue the investment or not. If you think the property will make a good investment, you can quickly contact the agents who can assist you with the deal with just one click.
On the other hand, if you think the property is not worth your money, you can find similar properties in the same area right at the bottom of the page. You may also search again using a different location and filters.
Find a High-Cash Flow Property Using Mashvisor
A rental property with a high positive cash flow is a lucrative investment. A high cash flow means you’ll generate sufficient returns to cover your expenses and realize a profit. To find properties with high cash flows, you need to use a rental property cash flow calculator, which is usually available online.
Since not all online cash flow calculators work the same, it’s important to be careful in choosing what to use. The best cash flow calculator available today is Mashvisor’s rental property calculator. Both seasoned and new investors will benefit from Mashvisor’s investment property calculator because it offers many features that can help them make the right decision.
Another reason Mashvisor’s rental property calculator is the best cash flow calculator option is that it offers additional benefits, like access to Neighborhood Analysis and Mashmeter.
Neighborhood Analysis allows you to see the breakdown of property types for long term and short term listings in a specific neighborhood. You will also get an overview of the occupancy rate, rental size distribution, rental income statistics, and historical rental income.
Presented as a percentage, Mashmeter is a unique tool that shows whether a particular neighborhood will be good or bad for real estate investing. The tool provides a reliable score based on actual historical data and analysis. With this data, you can easily compare areas and decide which one is best for your preferred real estate strategy.
When you’re ready to invest in a rental property, start your 7-day free trial with Mashvisor now.