Understanding Cash Flow in Real Estate

Cash flow in real estate means the money you have left after you pay for all the costs of renting out a property. But some people have different ways of figuring it out.

Cash flow is the money left after taking out the monthly expenses from rent. However, this formula doesn’t consider unexpected costs like repairs, vacancies, or extensive replacements like roofs or air conditioners.

If you don’t include these expenses, you might start spending the cash flow you made, and you won’t have enough money to pay for repairs/vacancies. 

Some people count all the expenses they can imagine, such as a 10% vacancy rate and a 10% repair cost, even if it’s unlikely.

The issue with this approach is that it can make investing in real estate look like it’s not worth it. When people don’t think they can profit, they won’t bother investing in it.

What Are the Top Methods for Estimating Cash Flow?

The first thing to think about is how to calculate your cash flow in real estate: monthly or yearly. You can also add “reserves” as an expense to your calculation.

Calculating the net cash flow can help you determine how much money you’ve made from your property without relying on what the previous owner or landlord told you. It can help you find out your ROI.

Calculating Cash Flow in Real Estate

Many people don’t like math in school, but it’s essential for success in real estate investing. If you know how your business makes money, you can help it make even more money. So, let’s talk about an essential part of math for real estate: cash flow.

As mentioned earlier, cash flow is usually the money that remains after paying all expenses. 

Cash flow is the money that real estate investors get after paying for all their expenses. These expenses include mortgage payments, taxes, insurance, repairs, utilities, vacancies, and other costs that affect the property. After paying for all these expenses, the remaining money is called cash flow.

To ensure that your property is making money, you need to analyze its cash flow correctly. Although it might seem easy, many people make mistakes with it. To calculate cash flow, you need to subtract your expenses from your income.

Sometimes, the total income is the same as the rent, but not always. There can be other forms of payment to consider, like late fees, application fees, or income from laundry facilities.

To check if a property will make you money, list all the ways you can earn from it, but be careful and assume you’ll get less than you hope.

Then, add all the income and subtract the expenses to find your NOI(net operating income). It tells you how much you can make from the property.

To make more money, try to increase income and decrease expenses. But remember to consider all the costs involved in owning the property.

Determining Good Cash Flow: What Metrics to Consider?

To have good cash flow, you want to earn more than $100 per unit after paying for everything, like the mortgage. For instance, if you have a duplex, you should aim for $200 monthly. If you believe in a fourplex, seek at least $400 monthly cash flow.

But, it depends on how much you invest too. If you invest a lot of money but only make $100 per month, it’s not a good deal. But if you invest less money and make $100 monthly, that’s a better deal.

Cash flow per unit is a good measure, but there’s another important one: cash-on-cash return.

Real estate is not the same for everyone.

If you know why you want to invest, you can decide which property to buy, how much to spend, and what strategy to use. People calculate cash flow differently, but we all know it’s the money you get from the rent after paying the expenses.

Factors that Can Kill Real Estate Cash Flow

Negative cash flow is terrible, so it’s important to know what causes it. You want to make more money than you spend. Repairs & maintenance can cost a lot of money and affect your tenants’ lives. If you delay repairs, your tenants may get more unhappy, and the repairs may become more expensive.

Losing tenants costs money. When tenants leave, you must do repairs and cleaning that can cost more than their deposit. If you have a property management company, they may charge you to find a new tenant. If tenants don’t pay rent, you lose money. Try to keep tenants for a long time. Encourage tenants to spend at least half their rent, but be understanding if they can’t spend all of it.

Practical Strategies to Boost Your Real Estate Cash Flow

You want to make more money than you spend monthly on your properties. To do this, you need good strategies.

You can make more money by raising the rent, but you should do it reasonably and consider how much your tenants can afford so they don’t leave. You could add a washing machine or AC to your rental to charge more. Or you could make your rental look better by improving its appearance.

Long-term tenants are essential for your business. If you have vacancies, you still have to pay for utilities like power & water. Preventative maintenance can save you money in the long run and keep your tenants happy. Please don’t wait until repairs are expensive; take care of them early. It’s not worth losing good tenants to raise the rent slightly.

Contact Strategy Properties to learn how you can start investing in Detroit, Michigan. Call today for free consultation (734) 224-5454. You can also email us at info@strategyproperties.com.