How do you calculate cash flow for an investment property? (2024)

24 MAR 2023 By Nicole Comendador 13 min read Finance

What is cash flow?

Cash flow is the amount of money coming into your investment property each month, minus the amount going out. It’s a good way to measure how well your investment property is doing and how much money you are making on it.

Cash flow can also be called “net operating income”. This is the amount of money coming into your investment property each month, minus the amount going out.

How do you calculate cash flow for an investment property?

#1: Determine the gross revenue of the property

To find out how much a property is gaining in revenue, you must first determine the value of the property and use it as the basis for calculating its rental fee. It is important to accurately value your property to ensure that you’re not operating at a loss.

The amount of rent you charge for your home has a significant influence on the performance of your investment. You want to maximise your revenue and maximise your return, but you also don’t want to overprice the property to the point where it is out of reach for potential renters.

#2: Subtract any debt related to the property

In simple terms, this refers to the amount of debt you have to pay each month or year for the rental property, which includes interest payments and other loans associated with the property.

Most investors have an ongoing debt in the way of a bank loan. Renting it out allows them to have revenue that will pay for their mortgage.

#3: Deduct all real estate-related costs

When it comes to investment properties, it’s critical to understand not just the initial fees but also the recurring costs. This refers to all the expenses related to the maintenance and improvement of your property, as well as insurance payments.

The capacity of an investor to foresee expenses and build a sound long-term strategy for dealing with them might be the difference between an investment succeeding or failing. Keeping track of these expenditures and adding them to your calculations might help alleviate any issues associated with your portfolio.

Here’s how to calculate your cash flow:

You bought the property for $500,000, paid a 30 per cent down payment of $150,000, and financed the rest for $350,000 at 6.5 per cent interest for 30 years, which gives you an estimated monthly payment of $2,212.

At the time of purchase, tax and insurance payments would be $2,900 per year or $242 per month. Now, you pay a total of $2,454 per month.

Let’s say this property comprises four identical units and they each rent for $960 a month. Assuming there is steady rental demand and all units are occupied, the computation will go as follows:

• Gross rental income will be $960 x 4 units x 12 months = $46,080 per year
• For mortgage payments, you pay $2,454 x 12 months = $29,448 per year
• Over the past years, expenses for repair and maintenance averaged $685 per year

Since the formula for calculating cash flow is rental income minus payments and expenses, your cash flow would be:

$46,080 (gross rental income) minus $29,448 (mortgage, tax, insurance) minus $685 (repair and maintenance) is equal to $15,947 or $1,329 in positive cash flow for 12 months.

It is important to note that several factors can affect your cash flow. Your property may not always be occupied, and expenses might be tricky as they do not cost the same every month or every year. To be safe, determine its value at a reasonable amount or percentage.

Conclusion

When you learn how cash flow is determined, it is clear that a positive cash flow signifies a healthy cash flow. The profitability of a rental property is directly related to the amount of cash flow it creates.

If you’re doing everything right, your investment property should be making money. But it’s important to track your cash flow so you can make sure this is happening.

If not, there may be some problems with the operation of your property that need to be fixed before it starts making more than it costs!

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