Turning a profit from your real estate investment is every property investor’s goal. Within this context, higher cash flow means a higher return on investment. But what is positive cash flow, and how do you run the numbers? Use this guide to learn everything you need to know.
What Is Positive Cash Flow in Real Estate?
Cash flow in real estate, in the simplest terms, is the net difference between money coming in and money going out from your rental property. Positive cash flow is the ideal circumstance, wherein income exceeds expenses, leading to a profit for the investor.
Maintaining positive cash flow is one of the most common ways of making money in real estate. Many real estate investors go for positive cash flow properties since they provide a consistent income which takes effect very quickly after acquiring the property. Achieving positive cash flow from your rental property is one of the main ways in which you can take on investing as a full-time job.
Within the context of rental properties, the bulk of incoming cash comes in the form of monthly rent payments from your tenants. It can also include other income sources, such as revenue from vending machines, laundry facilities, or whatever other amenities your income property provides.
Outgoing cash, on the other hand, is anything that you’ll need to pay to keep your investment property running. This can include maintenance fees, legalities, taxes, and other items. Generally, one of the best ways of maintaining positive cash flow is keeping an eye on — and minimizing — your property’s expenses.
Related: 5 Best Tips to Boost Your Real Estate Cash Flow Today
How Do You Calculate Cash Flow?
Calculating cash flow is fairly simple if you keep a close eye on the details. Follow the guide below for step-by-step instructions on how to calculate rental property cash flow.
Gross Income
Gross rental income (GRI) is the net total of all rent payments that you receive from your tenants in the span of one month. Let’s say for example that your rental property includes four units, and each unit is rented for $1000 monthly. Your gross rental income would, therefore, be $4000.
From there, you can figure out your gross income by adding all other sources of income to your GRI figure. Other sources of income can be incurred through, for example, laundry machine access, vending machines, parking space rental, etc.
Operating Expenses
Operating expenses include everything which must be paid in order to sustain your real estate investment. This includes property taxes, insurance, maintenance costs, and property management fees. For some properties, this can also include things such as marketing costs, legal fees, or other rental property expenses.
Another important thing to note when calculating operating expenses is vacancies. Vacancies represent a loss in income, and therefore would be included in this phase of the cash flow calculation. Assuming one vacancy in the aforementioned example of the four-unit property, your operating expenses would increase by $1000 to represent the lost potential.
Net Operating Income
The next step to calculating your cash flow is to find your Net Operating Income. To do this, you subtract your operating expenses from your gross rental income. This figure is usually calculated on an annual basis, meaning you’ll need to multiply your monthly figures by 12. Once this is done, you’ll have a clear idea of how much your investment property is bringing in annually from rental income, sans daily expenses.
Cash Flow from Operations
Finally, after all the legwork, you’re ready to calculate your cash flow from operations. Cash flow from operations is distinct from NOI in the fact that it also includes your capital expenditures. Capital expenditures are one-time payments that must be made for your property. This can include things like major upgrades, the addition of heating/cooling systems, or construction. It is usually recommended that real estate investors set aside around 5% of their gross rental income to avoid financial shock from capital expenditures. Once you’ve subtracted your capital expenditures from your net operating income, you’ve finally found out your cash flow from operations.
Cash Flow After Financing
If you’ve borrowed money to finance your real estate investment, as most do, it can also be very beneficial to calculate your cash flow after financing. This will show you what you can pocket at the end of the day once your mortgage lender has been paid. You can use online resources to figure out how much of your mortgage needs to be paid monthly and deduct this number from your cash flow from operations. If your numbers look good at the end of this process, then you’ve found a positive cash flow investment.
Related: The Best Approach to Investment Property Financing in 2019
Is There an Easier Way to Calculate Cash Flow?
Yes! While the process mentioned above isn’t too difficult, it can be tedious. You have to keep track of a lot of numbers, and minor mistakes can skew your results pretty dramatically. Therefore, if you need an easier and more accurate way to get this done, it would be smart to use a cash flow calculator. Consider using Mashvisor’s investment property calculator. The more time you save with the math, the more time you have to make smart investments! Having a convenient way to perform a cash flow analysis will allow you to compare multiple properties prior to your investment, and select the best one.
How Do I Find Positive Cash Flow Properties?
Finding a positive cash flow property is one of the best things you can do as a real estate investor. You’d, therefore, be wise to learn how to find positive cash flow properties for sale.
Finding positive cash flow real estate for sale is a lot easier than it used to be. You’ll generally want to search for properties that have a high return on investment, in relation to the listing price. There are a number of resources available to you, such as Mashvisor’s property finder which will give you an idea of a property’s anticipated cash flow and return on investment right away. Using these tools, you can carry out a complete investment property analysis, to ensure that it will be a sound investment.
Related: How to Find Positive Cash Flow Income Properties in the US Real Estate Market in 2019
Conclusion
What is positive cash flow within the context of a real estate investment? It is a situation wherein an income property has a higher income than expenses, leading to a profit for the investor. By knowing exactly what cash flow is and how to calculate it, you can run the right numbers for your next real estate investment and ensure that it is financially sound.