How to Calculate Rental Property Cash Flow
Cash flow equals income minus expenses. How hard can it be? Novice investors who have not reviewed how to calculate rental property cash flow could be in for an unpleasant surprise when anticipated income doesn’t cover anticipated (and perhaps unanticipated) expenses. The point of investing in real estate is to generate positive cash flow—money left over after paying the expenses related to owning and operating the property. If the expenses exceed the gross income, the property has a negative cash flow. Simply put, positive cash flow means the investor is making money, while negative cash flow means the investor is losing money.
The income from a rental property is the total rent, plus any fees or revenue from things like application fees, late fees, or pet fees.
The trickier part is calculating (or estimating) expenses. Some investors calculate the operating expenses without including the cost of financing—but financing is a real expense, so mortgage payments and PMI should still be deducted from income along with, or after, accounting for all other expenses, to get an accurate picture of cash flow.
In addition to the mortgage and mortgage insurance payments, a calculation of cash flow should reflect expenses for:
- Property taxes
- Hazard and liability insurance
- Trash collection
- Landscaping expenses
- Repairs and replacement of worn fixtures or appliances
- Vacancy rate
- Property management fees
- Any other regularly incurred expenses necessary to operate the property
Novice investors sometimes forget to calculate expenses for vacancies. Properties don’t magically rent themselves, and each time a tenant departs, there are costs associated with finding a new tenant and preparing the property for occupancy. These may include paint, new carpet, replacing appliances, and new landscaping.
Complicating matters is the fact that some of these expenses will fluctuate, and some don’t occur every month like clockwork. Investors must make informed estimates of the cost of operating and maintaining a property before they calculate rental property cash flow.
When considering investing in rental real estate in the Atlanta metro area, contact Excalibur Homes, a premier property management company in Georgia, for help making a realistic calculation of the expected cash flow from properties you are considering.