Cash flow is one of the most important concepts for rental property investors to understand.
In simple terms, cash flow is the money left after the property's income and expenses have been accounted for.
Basic Cash Flow Formula
A simplified formula is:
Rental Income − Operating Expenses − Debt Service = Cash FlowFor example, if a property generates $3,000 per month in rental income and has $1,800 in combined expenses and debt service, the remaining cash flow would be $1,200.
Common Expenses
Property expenses can include:
- Property management
- Maintenance
- Insurance
- Property taxes
- Utilities
- Vacancy
- Repairs
- HOA fees
- Capital expenditures
Not every expense occurs monthly, so investors should account for annual and irregular expenses when analyzing a property.
Why Cash Flow Matters
Positive cash flow can provide an ongoing income stream and help an investor manage property-related costs.
Negative cash flow means the property requires additional capital to cover its obligations.
Neither number should automatically determine whether a property is a good investment. The investor should understand why the cash flow exists and how sustainable it may be.
Use Conservative Assumptions
When analyzing a property, avoid assuming perfect occupancy, minimal repairs, or continuously increasing rents.
Conservative assumptions can help provide a more realistic analysis.
Connect Cash Flow to Your Overall Strategy
Cash flow is only one component of investment performance.
Investors may also consider appreciation, equity growth, tax considerations, financing, and risk.
A strong investment analysis looks at the entire picture.
