Like any other business, you make investments with the goal of generating a profit and cash flow. And, of course, the most basic way for you to calculate your rental property cash flow is to subtract your expenses from your total income find your cash flow, or profit. So, your income – your expenses = your cash flow. Of course, like any business, that simplistic approach for calculating profit and loss and the resulting cash flow doesn’t take into account the many nuances that come with investing in rental properties. So, to help you better gauge the cash flow you can anticipate from your rental properties, here are a few pointers.
The total income you receive on your rental property is much easier to miscalculate than many realize, which can lead to significant errors and potential losses. Your rental income is more than just the amount you collect in rent each month. You also will derive rental income from rental applications, late fees, bounced check fees, surrendered deposits, and other potential sources. It’s very important for you to record anything that generates any kind of revenue, especially recurring revenues, and ensure you include them in your total income calculations for any period of time.
Tracking your likely expenditures by far is the most difficult part of calculating the anticipated cash flow from your rental property. Predicting expenses is a big part of owning a rental property, as there are many potential costs that could lead to additional expenditures when something breaks, burns, gets torn down, or otherwise damaged or someone is injured. Yet, there are costs that are constant or relatively so, such as your mortgage payments, property taxes, scheduled maintenance, insurance premiums, labor costs, utilities, and other commonly recurring expenditures.
Tracking your recurring expenditures by grouping them together will help to tell you the minimum you need to take in to cover those costs, but you likely would incur a loss if those were your only expenditure considerations. You have other costs, such as vacancies, which prevent you from collecting rent but still need to be maintained, insured, and taxes paid. You also need to account for tenant damages, possible natural disasters, employee theft, vandalism, wear and tear, and many other potential costs that happen on occasion. If you track your average monthly costs over a period of years and carefully track and categorize each, it will be easier for you to get a more accurate estimate of your irregular expenses as well as your regular monthly and annual costs.
Once you have a grasp of your total income and expenditures, you need to include a bit of a cushion to ensure you don’t have any sudden costs overruns that kill your profits for the month or longer. So, when you calculate your cash flow, it helps to reduce your income by a small percentage and increase your expenses by an equal percentage, say, 5 percent, to create a built-in cushion of about 10 percent to help with your potential cost overruns.
If you are lucky and don’t incur any sudden expenses over the month, you will wind up with an extra 5 percent to 10 percent in cash flow for that month. The best thing for you to do with that extra income is to place it in an interest-bearing account that you can access quickly to cover possible cost overruns during other months. You also could use it for preventive maintenance costs to decrease the potential for sudden costs that might wipe out your cash flow. It’s important to know how to calculate rental property cash flow as it can help shield your investment from additional risk.
JWB has over 10 years experience managing turnkey rental property investments. We have a consistent approach that delivers steady cash flow from our clients investment properties. Curious what your cash flow could be from one of our rental properties? Try our cash flow calculator or contact us to learn more.