For any real estate investment, including rental property investment, cash flow is one of the most important considerations. Simply put, cash flow refers to the amount of income left in any business after all bills have been paid – in real estate, this means areas like mortgage, taxes, insurance, vacancies, repairs, utilities and other expenses.
At Americas Housing Alliance, it’s our goal to get you into a positive cash flow investment property. It helps if you know how to make the basic calculations for cash flow, and the formula is incredibly simple: Total income minus total expenses. Let’s look at each of these areas, plus an example of calculating cash flow.
Total income might just be equivalent to your total rent, but know that it won’t always be. There can be other sources of potential income, including application fees, late fees and laundry fees. List all possible sources of income, but be conservative here – it’s best to err on the side of caution and assume you’ll get less, then be pleasantly surprised if you get more.
Things get a bit more complex when it comes to expenses. Expenses can range from bigger areas like a mortgage, property taxes and insurance to more relatively minor concerns such as utilities, landscaping and various property management areas. To further complicate things, not all expenses will occur on a monthly basis. For this reason, it’s best to calculate a certain percentage of these expenses while planning – you may not have any vacancies at the moment, for instance, but if you assume your property will be empty for about one month each year and build this into your expenses, it’ll make things easier down the line.
As an example, you’re in charge of a double unit that rents for $600 a month per unit – or $1,200 in income. For convenience, we’ll assume other income sources aren’t present in this case. Between assumed expenses for repairs and vacancies plus taxes, insurance, standard maintenance and utilities, you’re faced with roughly $1,100 in monthly expenses. In this case, your monthly cash flow would simply be $1,200 minus $1,100 – or $100 of monthly positive cash flow.
To learn more about cash flow, or for help with investment property services, speak to the experts at Americas Housing Alliance today.