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ContinuePositive rental property cash flow is essential if you want to run a profitable, scalable business. But how much cash flow is good?
Written by
Ben Luxon
PUBLISHED ON
3
Feb
2023
Real estate is essentially a game of numbers, and while it may seem overwhelming, there are metrics that can assist you in analyzing the financial performance of your properties.
These metrics can also guide you in determining whether it's appropriate to invest further and expand your portfolio. Ultimately, if a property fails to generate the expected income, it can hinder the overall growth of your business. Therefore, understanding and accurately tracking your rental property cash flow is critical in ensuring success in the real estate industry.
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.
For example:
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 at least $100-$200 per unit can be considered good. This means that after all of the expenses have been taken care of, the landlord will be left with this net profit. 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 $100,000 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.
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.
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.
Finally, by adopting a quality property management accounting software like Landlord Studio you can.more accurately track your income and maximize your end of year deductibles. In a recent study, we found that investors that used software saved on average $500 more per property each year in deductibles than those that didn't.
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.
With accurate and up to date data you can run any of the 18+ reports to gain fast financial insights. For example, instantly generate a profit and loss report or Schedule E report to make filing an accurate tax return easy, or run a Trailing Twelve Month report monthly to review Net Cash Flow and identify opportunities for decreasing costs and increasing revenue.
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.
Landlord Studio is an easy property management and accounting software and app designed for landlords.
Track income and expenses, run reports, collect rent online, find and screen tenants, manage property maintenance, and more.
