One of the more important aspects of investing in single-family rental properties is understanding how to calculate your cash flow. Simply put, cash flow is how much money you have left after you’ve paid all of your property-related bills. It is the income that remains after you’ve paid your mortgage payment, insurance, taxes, utilities, vacancies, repairs, and all other related expenses. It sounds like a simple concept, but miscalculating cash flow is one of the most common mistakes that new investors make. By learning more about how to correctly calculate cash flow on each of your single-family rental properties, you can help to ensure that your investments remain profitable year after year.
Determine Total Income
To calculate your cash flow for a property, you first need to know two important numbers: your total income, and your total expenses. First, the total income. While in many cases your total income might be the same as the amount you’ve collected in rent payments, that isn’t always the case. There are several other potential sources of income that you will need to keep track of, including things like late fees, application fees, and so on. Security deposits, however, should never be included in cash flow calculations. They must be held and accounted for separately. Ultimately, when determining your total income, it’s best to be conservative and assume you’ll get a number somewhat below your ideal figure.
Calculate Total Expenses
While calculating your total income isn’t overly complicated, the part that often creates serious problems for new investors is figuring out your total expenses. Figuring out your rental property-related expenses may take a bit more time and effort than you think, and can even be fairly complicated. The reason for this is while you will have a list of fixed expenses that you must pay every month (mortgage payment, insurance), other expenses will either be paid less often (annually, for example) or are numbers that do not come from monthly bills (vacancy rate, capital expenditures). For example, it is important to include both mortgage insurance and the various other insurance policies (e.g. earthquake, flood, property hazard, etc.) into your calculations as a monthly number, even if the premiums are not paid every month. The same thing is true of property taxes, which are often billed once or twice a year.
Include Vacancies and Repairs
Where it gets really complicated is making sure your monthly expenses include amounts for vacancies, repairs, and improvements you have made or plan to make to the property. For example, your vacancy rate is often calculated as a percentage of your total income. Even if your property is not vacant now, you may want to assume that it will be empty for at least one month out of the year. If that is the case, then your vacancy expense would equal 1/12th, or 8.3 percent, of your total income. On the other hand, repairs and improvements tend to be less frequent expenses, but should still be included as an expense for cash flow purposes. Making sure you have these expenses correctly calculated and included among your property’s other expenses is essential to an accurate cash flow calculation. You also don’t want to forget to include expenses like regular maintenance, office supplies and software, gas and travel expenses, advertising, payroll, and property management fees.
Calculate Cash-on-Cash Return
Once you have your expenses correctly tallied up, you can then deduct that total from your total income and arrive at your property’s current cash flow. With your cash flow numbers in hand, you can then calculate other important figures, such as your cash-on-cash return on investment. This is the annual cash flow you receive based on the amount you have invested in your property and is a method you can use to compare returns on other types of investments. Knowing both your cash flow and your cash-on-cash return numbers can help you keep your investments on track and gauge how well they are performing relative to the market.
As an investor, your time is both limited and valuable. With so many tasks needing your attention, you need to prioritize your time on the most productive aspects of running your investment business – not the day-to-day management of the property. To free up your time, contact your nearest Real Property Management franchise office today. We can take on many of your most time-consuming property management tasks, giving you more freedom to spend your time the way you want to.
*Real Property Management is not a financial advisor. This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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