Positive rental property cash flow is essential if you want to run a profitable, scalable business. But how much cash flow is good?
Real estate is ultimately a numbers game and while it can be easy to get overwhelmed, there are metrics that can help you analyze the financial performance of your properties. Metrics will also inform you if and when you are in a position to invest further and expand your portfolio. At the end of the day, if a property is not bringing in the money you expect it to, it could hamper the overall growth of your business. This is where rental property cash flow comes into play.
Put simply, cash flow is the movement of money in and out of a business. In terms of real estate, cash inflows or income could consist of received rent and pet fees and outflows or expenses could include taxes, maintenance costs, and other fees. Positive cash flow is an indication that you are making more money than you are spending each month. On the other hand, negative cash flow is a sign of the opposite.
In order to determine whether a rental property is performing well financially, you’ll want to undertake a cash flow analysis. Cash flow can be calculated by subtracting your expenses from your income.
Monthly rental income: $800
Monthly operating expenses:
Cash flow: $120 ($800 – $680)
After the expenses have been subtracted from the income, this property is left with a cash flow of $120 per month.
Any positive cash flow is better than negative cash flow, yet it should still be substantial enough to make your investment worthwhile. Generally speaking, a cash flow of around $100-$200 per unit can be considered good. This means that after expenses have been taken care of, the landlord will be left with this money in their pocket. It can then be put towards further investment efforts or saved as security.
While cash flow is a relatively easy calculation to perform, it should not be taken at face value, as there are other factors that determine the overall financial health of a property.
When analyzing rental property cash flow, the purchase price of the property should be taken into account. A property that was purchased for $200,000 but has a cash flow of $150 per month is very different from a property that was $800,000 with a cash flow of $150 per month. Cash flow is very much relative to the purchase price of the property.
As careful as you are, there is sometimes no way to escape dips in your cash flow. Some of the factors that can harm your cash flow are:
Depending on the severity of unexpected expenses, they may temporarily derail your cash flow. For example, a burst pipe in the middle of winter may incur a hefty maintenance fee. Similarly, although not the norm, nightmare evictions are still a risk that can result in one-off legal fees and unwanted vacancies.
If you find that your property is not bringing in favorable cash flow, you may be able to increase it in a number of different ways:
Finding ways to maximise your rental income can help you hit those higher cash flow goals. Nonetheless, you should be reasonable in what you charge for rent, for example, to ensure your property remains attractive to potential tenants. If you live in a state or city that is rent controlled, you may be limited by legislation. If your current tenants are not pet owners, enforcing a pet fee and monthly pet rent will not lead to any discernable change. Adding a pet policy to the lease agreement during a vacancy however, can lead to a widened pool of potential applicants and increased monthly income.
Alongside cash flow, another useful calculation to have on hand is rental yield, which measures how much cash a rental property produces each year as a percentage of the asset’s value. Rental yield is unlike cash flow in that it does take the property value into account. Landlord Studio’s free rental yield calculator will help you easily measure this.
Without consistently tracking your income and expenses, you will be unable to accurately calculate the cash flow of your rental property. Utilizing purpose-built property management software like Landlord Studio will allow you to keep on top of your bookkeeping throughout the year. Then, whether you want to generate profit and loss reports at the end of the tax year or run the numbers quickly partway through the year, all of your data is easily accessible and organized.
Keep in mind that every landlord has a slightly different portfolio. A healthy cash flow for one landlord, may be considered disastrous for another. How much cash flow is good for a rental property depends on the location and purchase price. A cash flow of $100-$200 is ideal but this should be viewed within the wider context of your personal portfolio.
The bottom line is that any positive rental property cash flow is good as this can lead to higher profit, increased opportunity to invest further, and can act as a safety net, should unexpected expenses arise. If you are just breaking even without making any real gains, the investment may not be considered worthwhile.