Cash is king. And in real estate investing, cash flow is many investors’ most important metric. Why? Because cash flow allows investors, like you, to retire from their jobs, become financially free, and profit from their investments. Cash flow is the passive income that fuels your fire. So what’s the best way to calculate it? How can you increase cash flow on your rentals? And what will hurt your cash flow? We’ll give you answers to how to calculate and improve cash flow in a rental property in this article!
What is Rental Property Cash Flow?
Cash flow is one of the most important metrics in your rental property investment. It tells you how much money your property earns each month and allows you to determine whether or not it’s a good investment for you. Cash flow measures income minus expenses, so if your rental property brings in $2,000 per month but has expenses of $1,500 per month, then its cash flow would be $500.
Factors That Impact Cash Flow
Cash flow is affected by only two things: income and expenses. So any expenses will lower your cash flow and any income will increase it.
- Utilities: If you’re paying for your tenant’s utilities, this monthly amount will be deducted from your cash flow. Utilities include anything like water, gas, electricity, garbage, sewer, etc.
- Property Management: Property management costs often range from 8% to 12% of rent per month, per property.
- Insurance: Landlord insurance or a rental property home warranty can cost anywhere from fifty dollars a month up to thousands of dollars a month (if you’re in Florida!).
- Maintenance and Repairs: Maintenance and repairs are often a surprise, but you should always factor a monthly repair expense into your cash flow calculations.
- Vacancies: In between tenants, your rental property will be empty, and that means no rent! Always account for a probable vacancy rate in your cash flow calculations.
- Property Taxes: Property taxes are calculated from how much the local government values your property. Prepare to pay city, town, or/and county taxes every year!
- Misc. Expenses: Miscellaneous expenses are anything like pest control, snow removal, tree trimming, etc.
- Rent: Rent is the biggest positive number in your cash flow calculations.
- Extra Income: Extra income goes on top of your monthly rent, this can be anything from extra pet rent to late fees and more.
When to Calculate Cash Flow on Rental Properties
When doing a rental property analysis, cash flow can be a great metric after a property has passed its initial sniff test. If you’ve already calculated the property’s gross rental multiplier, cash flow can then be your next follow-up calculation to see whether or not the property would put money into your pocket.
How to Calculate Cash Flow
Cash flow is easy to calculate, so easy that it only takes a few simple steps:
- Add up all your rents and income you receive (that means late fees, pet fees, etc.)
- Minus all your expenses for the month, which includes regular expenses and allocations for BIG repairs (like roofs, septic, HVAC systems, etc.)
- Deduct your income from your expenses.
Income – Expenses = Cash Flow
An Example of Cash Flow Calculations
You found a rental property to buy. It will bring in $2,000 per month, with a monthly PITI (principal, interest, taxes, and insurance) payment of $1,200, $200 for property management, $150 for repairs, $50 for vacancy, and no payments for utilities (since your tenants cover it!).
This is how the calculations would look like:
$2,000 – $1,200 – $200 – $150 – $50 = $400/month cash flow!
Not bad!
Benefits of Calculating Cash Flow on Rental
Calculating cash flow can be a valuable tool for analyzing potential investment properties. It can help you determine whether or not the property will be profitable, and also provide insight into how much of that profit you’ll make. But, before you calculate your rental’s cash flow, you should have some cash flow number in mind to compare it against.
If you know that rental properties in your area often cash flow $400/month, and your rental will only cash flow $50/month, you may want to look into other properties.
Limitations of Calculating Cash Flow on a Rental
Cash flow is not a perfect science. It can be affected by many factors, including the market and interest rates. If you’re going to use cash flow as a benchmark for your investment, it’s important to understand that every property is different and may produce different returns than others in the area.
For some markets, like much of California or New York city, a rental property may not cash flow and merely break even, but the money will be made in appreciation. In states like Alabama, Iowa, and Ohio, cash flow can be much more plentiful, but you won’t get close to the same amount of appreciation.
This is why metrics like ROE (return on equity) are much more accurate in calculating profits since they don’t JUST look at monthly cash flow, but look at the overall profit of a property. Another great metric is cash on cash return, which shows you how effectively your initial investment is being used.
What is Considered a ‘Good’ Cash Flow for a Rental?
Most rental property investors shoot for somewhere between $100 and $300 per month in cash flow, per unit. But this depends heavily on the market and the type of rental property strategy you’re using. If you’re investing in a high-appreciation market, you can often have no cash flow. In a cash-flow market (like Ohio), you can expect anywhere from a few hundred to a thousand dollars in monthly cash flow.
But, let’s not forget about other cash flow-boosting strategies! Medium-term rentals (traveling nurse housing) can often make $1,000 – $3,000 per month in cash flow. Short-term rentals can make $5,000+ per month in cash flow!
More work = more reward!
Tips to Improve Cash Flow on Your Rental
Is your cash flow not looking so hot? Here are a few ways to increase your cash flow on a potential or current rental property:
Increase Rent
If your monthly rent is lower than the local comps, you may want to slowly start increasing your rent. This can either happen when you resign a lease with a current tenant or when you get a new tenant. Don’t know how much you should charge for rent? Check Rentometer!
Allow Pets
Many landlords don’t allow pets, leaving tenants with pets on an increasingly difficult search for a rental that will work. This means that if you allow pets, you could cater to tenants who are willing to pay more than market rent. Now, you can charge an extra monthly rent fee per pet. This is often anywhere from $50 to $200 per month, per pet. Remember to collect a pet deposit though!
If you do accept pets, make sure you make your rental safe for them. That means strengthening or repairing fences, getting rid of dangerous yard plants, or removing breakable glass surfaces from the property. If someone, or something, can get hurt, you could be liable!
Do Preventative Maintenance
If you’re anticipating a much-needed repair, do it sooner rather than later! This will not only make your current tenants more comfortable but greatly reduce your chance of vacancy in-between tenants! Big ticket items to repair would be roofs, furnaces, air conditioners, or septic systems.
Refinance at a Lower Rate
As of writing this, the current mortgage rates are 7.5%. So, if you get the chance to refinance back down to a 3% or 4% rate, the closing costs may be completely worth it! On a $500,000 house, a 3% interest rate reduction could result in an extra $900 in cash flow per month!
Manage the Property Yourself
Property management can dramatically cut into your cash flow. By charging 8% to 12% per month, as soon as rent is due, your property manager already takes hundreds of dollars off the top! You can get around this by managing a rental property yourself. Don’t know how to do so? Check out our property management guide!
Switch Strategies
Long-term rentals aren’t the only way to go! There are a handful of other strategies that can dramatically increase your monthly cash flow. Medium-term rentals (monthly rentals for traveling nurses, executive travelers, etc.) can often double your monthly rent, without many (or any) added expenses to you!
If you’re in a vacation or travel hotspot, short-term rentals can double, triple, or quadruple your monthly cash flow, but you will have to account for much higher turnover costs. If you want to learn how to do this WITHOUT buying a property, read our Airbnb arbitrage guide.
No matter where you buy, there’s probably a possibility for you to increase rents with these strategies!
About to Buy? Calculate Cash Flow!
While cash flow is not the only metric you should be using to evaluate a rental property, it can be a helpful starting point. It will also help you understand how much money you need to make monthly or annually for your investment to be profitable. But remember, cash flow is not the ONLY metric worth calculating. I suggest running all of the numbers yourself or using a rental property analysis tool, like DealCheck to do the legwork for you. Always take a full look at equity appreciation, tax benefits, and other types of rental property “profit” before you buy.
If you’re looking for passive income and financial freedom, cash flow is the way to go!
