So you’ve finally decided on picking up that real estate investment opportunity. The next big thing on your mind now is how much profit your investment would create. In real estate, people sell, lease, or rent. Understanding how your rent generates income allows you to have an overview of expected cash flow. Also, read about net effective rent before making any decision.
To start with, what does the term “cash flow” mean?
Cash Flow
You’d often hear investors mention something about cash flow and probably aren’t sure of its meaning.
Cash flow broadly means “Passive income.” It is the money your investment breeds over and above the costs incurred in maintaining your property. Or see it as regular income minus routine expenditure. You might want to calculate it, either on a monthly or annual basis.
Passive income implies that it is quite different from your regular 8-hours-a-day work. Little actual working hours are put into passive investments.
A rental property analysis calculator helps you with deciding the profitability of a property. Ensure to make adequate research on the property to ascertain how much cash flow it’ll provide.
Two crucial factors you have to take note of in determining cash flow are income and expenditure. You’d have to be able to foresee what these two hold concerning a property. Generally, properties having a positive cash flow are what real estate investors seek.
Using a Rental Property Investment Calculator
Before using that rental property investment calculator to forecast cash flow, take note of the following:
- What is your total expected expenditure on the property?
- What’s the expected income?
- Are there any outstanding debt services you received on the property?
- Deduct the debt services and expenditure from all expected monthly income. The difference is your cash flow.
What and what makeup expenditure on real estate properties?
Expenditure
When going into an investment, it is advisable to make room for unexpected expenditures. There are some fees to consider when using a rental cash flow calculator. Examples of such expenses include mortgage, debt servicing, trash, repairs, insurance, parking agency, etc.
Income
Broadly, the income that the property would yield comes from rental fees.
There are, however, other possible income streams, such as laundry and rent processing fees.
The income talked about here is the income you get before subtracting mortgage and other expenses. You could also offer extra services to your tenants, such as moving luggage, etc.
An Example
Let’s look at a typical cash flow calculation procedure:
Sarah is considering an apartment.
If she buys the apartment, its projected monthly rent is $ 1,500.
Trash, sewage, and water services would cost a total of $ 180 every month.
Sarah’s real estate investment broker says the expected usual monthly vacancy in that vicinity averages $ 45. But Sarah is advised by her broker to save $ 100 monthly for house repairs.
Sarah’s employing a management company which she’ll pay $ 100 each month.
On capital expenditures, Sarah hopes to put aside $ 45 each month. Capital purchases may include new appliances and electrical fittings.
And lastly, the monthly mortgage is $ 400 each month, excluding insurance and tax costs. Tax and insurance make up to $ 200 a month.
So, what is Sarah’s monthly cash flow?
Monthly income = $ 1,500
Monthly Expenses:
Trash + Sewage + Water = $ 180
Vacancy = $ 45
House Repairs = $ 100
Property management company = $ 100
Capital expenditures = $ 45
Mortgage fees = $ 600
Add up all these expenses, and you have $ 1,070 per month.
Cash flow means the difference between the projected income ($ 1,500) and expenditure ($ 1,070).
Sarah would therefore earn $ 430 every month from her real estate rental property! That’s what a positive cash flow resembles. If she has a property with four above property units, that’s $ 1,320 for the four properties.
There’s what a rental cash flow calculator resembles. You can find rental cash flow calculator at theshorttermshop.com
However, cash flow calculations are projections and forecasts. Some projected expenses might not be exhausted. Using a rental cash flow calculator helps give a rough idea of the investment’s degree of profitability.
Cash Flow is Dynamic
There’s a dynamic nature to the cash flow that eventually accrues to an investor. Cash flow is influenced by some factors, which can be very unpredictable. Sometimes, the economy or market could cause a tilt in the projected cash flow.
One thing recent global developments have taught everyone is: any economy can be grounded without notice. The world is still picking up global economies from the effect of the current pandemic. You couldn’t possibly plan for an unexpected health personal, associate, or community health crisis.
Also, you might find a way of reducing marketing costs and increasing rent along the way.
Nevertheless, utilize professional help in calculating rental cash flow.
How You Can Raise Your Cash Flow
Profit is the primary reason many invest. We’ll look into ways you could raise your cash flow.
By Avoiding Excess Maintenance and Repair Costs
Avoid excess maintenance and repair costs through planned maintenance. Planned maintenance is periodic maintenance to prevent unexpected and costly equipment breakdown. An example of planned/preventive maintenance is regular air conditioning system servicing. Also, ensure to service existing debts to prevent piled up interests.
Planned maintenance would help reduce the potential expenses you could incur on your property. Doing so ultimately increases cash flow.
Bargaining a Reduction in Taxes
The thing about real estate taxes is that they could increase almost annually. If the taxation on your property rises too high, it could reduce cash flow.
Look for ways to bargain with the local government in your vicinity to reduce taxes on your property possibly.
Rent Increase
The simplest way to add to your cash flow is by increasing the rent on your units.
There are different ways for a rent increase to generate additional cash flow.
You could beef up your property by renovating it, painting it, and adding some newer features. Doing so would justify your rent increase with potential tenants.
You may increase the rent on your property if it is in a competitive environment. Such environments have rental properties in high demand. So, when you raise the rent, there’ll usually be tenants who can take them.
You don’t have to go through the hassle of racking your memory to calculate cash flow. Utilize professional rental cash flow analysis calculators to ease your investing procedure.
