Nobody gets into real estate investing just for the fun of it. While it’s certainly rewarding to those who know what they’re doing, rental property investing is all about the money. People invest in rentals for the sole purpose of earning monthly cash flow. And the most successful investors are the ones who know how to pull the right levers and push the correct buttons to increase cash flow over time and boost ROI.
Calculating Rental Property Cash Flow
In real estate, cash flow is best described as the difference between a property’s income and expenses (which includes all forms of debt). Cash flow can be calculated on an income-producing rental property, including a single-family home, apartment complex, duplex, or even a commercial office building or industrial warehouse.
Property has a positive cash flow when there’s more income than expenses. A property is said to have a negative cash flow when expenses are greater than income. As cash flow increases, so does the investor’s ROI.
When calculating cash flow, it’s a numbers game. And assuming you have accurate numbers in front of you, it’s very simple”
- Step 1: Determining the gross income for the rental property (including rent and any other forms of income).
- Step 2: Subtract all expenses related to the property.
- Step 3: Deduct all debt payments (like the mortgage).
- Step 4: The resulting number is your monthly cash flow.
Most properties only have one source of income; however, there are situations where you may be able to add sources of income to enhance cash flow. (We’ll discuss a few options below.) In terms of expenses, make sure you account for everything in these calculations. This includes property taxes, insurance, property management, utilities, advertising, and even a cushion for vacancy rate.
“Every investor has different financial goals. Some are happy with an 8% return on investment (ROI) while others seek an ROI of 15% or more,” investor Liz Brumer writes. “There is no magic number that is the perfect or right amount of cash flow to earn.”
While there might not be a perfect amount of cash flow, it’s a good idea to determine your own needs ahead of time. This allows you to run accurate numbers when evaluating a property. It also gives you a figure to shoot for as you optimize income and expenses over the life of ownership.
How to Improve Cash Flow on a Rental Property
Every rental property will require a unique approach. Having said that, here are several tactics that are commonly used:
- Increase the rent. While there are state-specific rental increase laws that dictate how much you can increase the rent in any given year, most properties have a little bit of wiggle room. It’s usually best to increase rent between tenants, though you can typically raise rates on an existing tenant, as long as you give them 30 to 60 days’ notice (based on state laws).
- Add additional income streams. Depending on the type of property you have and your location, you may be able to add new streams of income. Options include cleaning services, rent storage space, parking, laundry service, pet fees, and vending machines (for apartment complexes or commercial buildings).
- Hire a property manager. At first, you might think hiring a property manager would decrease cash flow by giving you another expense. However, if it’s a good property management company, they’ll actually save you money through streamlined processes, better tenant screening, and negotiated rates with contractors.
- Refinance. Another option is to refinance to a lower interest rate. Along this same line, you can shop around your insurance to see which options are out there.
It’s almost always possible to reduce cash flow with the right combination of tactics. Take your time and play around with the numbers. The goal is to increase cash flow without causing unnecessary friction with renters.
Beef Up Your Bottom Line
Even the smallest increases in cash flow can be meaningful. For example, going from $900 to $1,000 per month in cash flow might not seem like that big of a jump. But it comes out to $1,200 per year – and $24,000 over a 20-year period. If you do that with several rental properties, it starts to add up.
The point is, you don’t have to make massive changes. Start small and trust the process. Little improvements can go a long way!