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cash flow

Ever wonder how real estate investors make money? There are some key terms you need to know first. One of the most important is cash flow.

This means the money coming in and going out of your property investments. It’s crucial to understand cash flow because it directly affects your overall profit. To help you out, here’s a guide to cash flow in real estate.

How Do You Boost Your Cash Flow?

Rental properties offer investors two ways to make money:

  • Monthly income: This comes from the rent you collect from tenants, minus any expenses associated with the property.
  • Appreciation: Over time, the property’s market value might increase, allowing you to sell it for a profit.

Cash flow properties are specifically chosen for their ability to generate a steady stream of income through rent. While they might not see the same level of appreciation as other properties, they provide a more reliable monthly profit.

Why is Cash Flow Important?

Cash flow is important because it ensures that a property generates sufficient income to cover expenses, debts, and provides returns to investors. For example you can:

  • Reinvest: Grow your portfolio by buying additional properties.
  • Pay off your mortgage faster: Free up cash flow and build equity quicker.

Cash flow is also crucial for several financial calculations used in real estate investing, such as:

  • Cash on cash return: This measures your annual return on the money you actually invested (cash invested) compared to the net cash flow you receive.
  • Net present value (NPV): This considers the time value of money and helps you understand the present-day value of your future cash flow from the property.
  • Internal rate of return (IRR): This tells you the expected annual growth rate of your investment based on your net cash flow.
  • Debt service coverage ratio (DSCR): This assesses your ability to cover your mortgage payments with the income (NOI) from the property, excluding the mortgage payment itself.

By understanding cash flow, you can make smarter investment decisions and track the performance of your real estate portfolio.

How to Calculate Property Cash Flow?

Calculating cash flow involves a simple two-step process:

  1. Add all your income sources: This includes your annual rental income and other income generated by the property like pet fee, laundry fees etc.
  2. Subtract all your expenses: This includes factors like vacancy rate (potential rental income lost due to the property being unoccupied), mortgage payment, property taxes, repairs, and maintenance costs.

Let’s look at an example to illustrate this:

  • Annual Rent: $12,000
  • Vacancy Rate (estimated): 5% (meaning you might lose $600 in rent due to vacancy) = -$600
  • Annual Mortgage Payment: -$7,000
  • Annual Operating Expenses & Repairs: -$1,400

Projected Net Cash Flow: $3,000

In this example, after subtracting all the expenses from the rental income, you’re left with a net cash flow of $3,000 annually. This indicates that the property is generating positive cash flow.

Related Post: Better Cash Flow: Single vs. Multifamily Properties
Related Post: 5 Strategies for maximizing cash flow in multifamily properties

Conclusion

Understanding cash flow is essential for making informed real estate investment decisions. By calculating the property’s net cash flow, you can assess its profitability and track the overall performance of your portfolio. Remember, a positive cash flow property puts money in your pocket every month, allowing you to reinvest, pay down debt, and achieve your financial goals faster.

DealWorthIt simplifies the underwriting process for cash flow properties. Our software streamlines data collection and analysis, enabling you to:

  • Effortlessly gather property details: Enter rental income, expenses, and other crucial factors to calculate potential cash flow in seconds.
  • Access advanced calculators: Utilize built-in tools to assess key metrics like cash on cash return, DSCR, and IRR, providing a comprehensive financial picture.
  • Scenario planning: Model different vacancy rates, repair costs, and mortgage options to see how they impact your cash flow.
  • Data-driven decisions: Make informed investment choices with clear cash flow projections and insights.

By using DealWorthIt, you can confidently identify properties with strong cash flow potential and build a real estate portfolio that generates consistent income.

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