How to Calculate Cash Flow for Rental Properties?

Cash flow is the lifeblood of rental property investing. It’s what keeps your investment alive, pays your bills, and helps you grow your portfolio. But how do you calculate it? And why does it matter so much?

In this guide, we’ll break down everything you need to know about cash flow—what it is, how to calculate it, and why it’s the key to successful rental property investing. Let’s dive in!

What is Cash Flow?

Cash flow is the amount of money left over after all the expenses of owning and operating a rental property are paid. In simple terms, it’s the profit you make from your rental property each month.

Positive cash flow means you’re making money. Negative cash flow? That’s a red flag.

Why Cash Flow Matters

Cash flow is crucial because:

• It covers your mortgage, taxes, and other expenses.

• It provides a steady stream of passive income.

• It allows you to reinvest in your property or buy more properties.

Without positive cash flow, your rental property could become a financial burden instead of an asset.

How to Calculate Cash Flow for Rental Properties

Calculating cash flow is simple if you know what numbers to plug in. Here’s the formula:

Cash Flow = Total Rental Income – Total Expenses

Let’s break it down step by step.

Step 1: Calculate Total Rental Income

This is the money you earn from renting out your property. It includes:

• Monthly rent payments.

• Additional income (e.g., parking fees, laundry, pet rent).

Example:
If you charge 1,500inrentand1,500inrentand50 in pet rent, your total rental income is $1,550 per month.

Step 2: Calculate Total Expenses

Expenses are the costs of owning and operating your rental property. They include:

1. Mortgage Payments:

   • Your monthly loan payment (principal + interest).

2. Property Taxes:

   • Annual taxes divided by 12.

3. Insurance:

   • Landlord insurance premiums divided by 12.

4. Maintenance and Repairs:

   • Set aside 1% of the property’s value annually for maintenance.

5. Property Management Fees:

   • Typically 4-12% of monthly rent if you hire a property manager. Some property managers charge a flat fee.

6. Vacancy Costs:

   • Estimate 0-10% of annual rent to account for vacancies.

7. Utilities and Other Costs:

   • If you cover utilities, HOA fees, or landscaping, include these too.

Example:

• Mortgage: $800

• Property Taxes: $200

• Insurance: $100

• Maintenance: $150

• Property Management: $155

• Vacancy Costs: $100

• Utilities: 50∗∗TotalExpenses=50

  ∗∗TotalExpenses=1,555**

Step 3: Plug the Numbers into the Formula

Now, subtract your total expenses from your total rental income to find your cash flow.

Example:

• Total Rental Income: $1,550

• Total Expenses: 1,555∗∗CashFlow=1,555

  ∗∗CashFlow=1,550 – 1,555=−1,555=−5**

In this case, you’re losing $5 per month. That’s a sign to either increase rent, reduce expenses, or reconsider the investment.

Tips for Improving Cash Flow

If your cash flow isn’t where you want it to be, here are some ways to improve it:

1. Increase Rent:

   • Research local rental rates to ensure you’re charging market value.

2. Reduce Expenses:

   • Negotiate lower insurance premiums or property management fees.

3. Minimize Vacancies:

   • Keep your property in great condition and market it effectively.

4. Add Income Streams:

   • Charge for parking, laundry, or pets.

Why Cash Flow is Just the Beginning

While cash flow is important, it’s not the only factor to consider when evaluating a rental property. You should also look at:

• Appreciation: How much the property’s value is likely to increase over time.

• Tax Benefits: Deductions for mortgage interest, depreciation, and repairs.

• Leverage: Using borrowed money to amplify your returns.

Calculating cash flow is a simple but essential skill for rental property investors. By understanding your numbers, you can make smarter investment decisions and build a portfolio that generates steady, passive income.

Ready to crunch the numbers? Use our free rental property cash flow calculator to get started.