So, you finally found some real estate to buy and you want to know how much cash flow your rental property should produce to be a good deal.
Well, congrats, you’re already 10 steps ahead of most people who just consume real estate investing content without taking any action.
Now, how much cash flow do you need to be secure, justify the investment, and reach your financial goals?
How to calculate cash flow — and see if it’s good
It might seem really easy to figure out cash flow, yet a lot of people get it wrong. To calculate it, you subtract the expenses from the income:
Cash Flow = Total Income – Total Expenses
On paper, it looks easy, right? But the reason so many people screw this up is because while the equation is simple, the items that make up the equation are the tricky part.
In other words, people don’t know how to calculate their income and expenses properly.
Total income calculation
Income doesn’t only include the total rent. There may be other sources of income you need to account for, such as laundry, application fees, late fees, pet fees, etc.
Expenses to consider
Be as specific as possible about your expenses to get the most accurate estimate.
Some common examples might include:
- Property management fees
- Utilities (water, sewer, trash, electric, propane, natural gas, etc.)
- Legal fees
- Mortgage payment
- Mortgage insurance (PMI or MIP)
In addition, keep in mind that not all of these will occur each month. As a result, it’s best to calculate a certain percentage for those expenses when planning for the future.
So, what is “good” cash flow?
The short answer to this question is this:
Any amount of positive cash flow is good. and the bigger, the better.
But if I were to give a specific number, let’s take a 16-unit property as an example.
That deal should produce at least $24,000 a year — regardless of cash-on-cash percentage.
Cash flow is the holy grail of real estate. So, the biggest thing to keep in mind with your investment property is that you want to do everything possible to increase it.
You can do so by adding more value to the property, increasing your rent, looking for long-term tenants, maintaining the building properly, etc.
And finally, it would be a shame not to mention that I have a free real estate training where I show you how I turned $3,000 into $4 billion in assets. Go check it out here.