For many, many investors, you either invest in real estate for cash flow or you don’t invest at all. Why such a strong statement? Well, that’s because cash flow is such a strong force when it comes to rental properties. So strong, in fact, that cash flow is essentially the main form of profit made from rental income. This makes investors wonder, just how much cash flow is good for rental property?
What Is Cash Flow?
Before we dive into how much cash flow is good for rental property, let’s backtrack and talk more about cash flow. Cash flow is the difference between the rental income of an investment property and its expenses. It basically tells a real estate investor if he/she is making money and how much of it is made. A positive cash flow investment property, also known as a positively geared property, is an investment property that generates more rental income than expenses. The opposite of a positively geared property is a negative cash flow property. Negative cash flow income properties generate more in expenses than rental income and thus serve as a loss for a real estate investor.
How Is Cash Flow Calculated?
As previously mentioned, cash flow is the difference between the rental income of an investment property and its expenses. The standard way of calculating cash flow is:
Cash Flow = Total Rental Income – Total Expenses
To calculate the cash flow relative to the investment property, cash on cash return is used:
Cash on Cash Return = (Annual Rental Income – Expenses and Costs)/Total Cash Investment × 100%
The best tool a real estate investor can possibly use to calculate cash flow is a rental property or Airbnb calculator. The alternative is to use manual spreadsheets, which are laborious to say the least.
Related: Why an Investment Property Calculator is Better Than Spreadsheets
An investment property calculator simply requires a few input variables from the investor. It then calculates cash flow immediately. The information provided by the calculator can tell you how much cash flow is good for rental property, but more on that in a little bit. For more on cash flow property analysis and investment property analysis, be sure to check out Mashvisor’s investment property calculator.
How Much Cash Flow Is Good for Rental Property – Not as Easy as It Sounds
So, exactly how much cash flow is good for rental property? Like many things in investment property analysis, the answer depends. Still, simply because the result depends on some factors, this does not make it simple to determine. The ranges of ‘good’ for other metrics for real estate market analysis, like cap rate and cash on cash for return, are also situational, but at least there are agreed upon percentage ranges for these metrics. This isn’t exactly the case with cash flow as a pure value.
Related: What Are the Best Cash Flow Investments?
The one thing that is for sure, however, is that positive cash flow properties are what real estate investors should aim for. The more positive cash flow an investment property has, the better. From there, along with some influences, we can determine how much cash flow is good for rental property.
Things to Consider
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Type of Property
The type of rental property is vital when figuring out how much cash flow is good for rental property. Investment properties with multiple units are expected to have higher cash flows than single unit properties. As a result, multi-family properties typically have higher cash flow than single-family properties.
The overall price of an investment property also factors in to how much cash flow is good for rental property. Properties that are more expensive, and typically are of a higher risk, would warrant higher cash flow than less expensive real estate investments. Properties with renovations and amenities also have high rental income (and thus cash flow).
Related: Rental Renovations with the Highest ROI
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Location
The most significant aspect of real estate market analysis is location. The location of an investment property is vital when discussing cash flow property analysis. A lot of the primary expenses, like interest rates, property taxes, and association fees, are strongly influenced by the location of a property. The amount of rental income is also heavily tied to areas, assuming the properties in question are very much alike.
Other non-real estate market factors impact an area’s measure of good cash flow. Influences from legislation and the economy can significantly impact cash flow in an area. Therefore, comparing a positively geared property in one area with that of another in terms of cash flow is not very useful.
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Investment Strategy
The investment strategy of a rental property also impacts cash flow. An Airbnb investing strategy, for instance, tends to yield higher cash flow than the traditional real estate investing strategy. Other strategies, like fix-and-flips, can vary significantly in cash flow.
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Rental Property Financing
The financing of an investment property can also play a huge role in cash flow property analysis. To figure out how your investment property’s financing impacts your cash flow, be sure to use Mashvisor’s investment property calculator.
Final Answer – How Much Cash Flow Is Good for Rental Property?
It is not very easy to quantify what good cash flow is for investment properties because cash flow is merely a value. The previously mentioned factors also make cash flow comparison difficult.
So, what is the solution? In order to determine how much cash flow is good for rental property, we need to express cash flow as a percentage, not as a variable.
There are two ways to turn cash flow into a percentage. Both ways are pretty similar, and they both factor in aspects of real estate market analysis and investment property analysis.
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Cash on Cash Return
Cash on Cash Return = (Annual Rental Income – Expenses and Costs)/Total Cash Investment × 100%
A good positive cash flow investment property, in terms of cash on cash return, is a property that generates anything that is 8 percent or more.
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Cash-Zone Formula
Cash-Zone = (Gross Annual Rental Income/Property Price) × 100%
A good cash flow, in terms of cash-zone, is anything that is between 8 to 10 percent or more.
For more on cash flow property analysis and investment property analysis, start your trial with Mashvisor to use its investment property calculator!