Cash flow is the money flowing in and out of operating your rental property.
Many investors live by the positive cash flow generated from the rentals.
You can use the following very simple formula to calculate cash flow.
Even before buying a property, you can estimate the cash flow to determine if the property is a good investment.
In another article, we also discuss a modified formula that factors in tax deduction, which gives you a true cash flow because of the tax savings allowed by the IRS.
Cash flow formula: Rental Income - Operating Expenses - Debt Payments The cash flow formula can be used for monthly or annual cash flow depending on the numbers provided.
Let's calculate an annual cash flow example for a $150,000 single family house with 20% down payment ($30,000).
Rental income is the rent received annually.
For $1,000 monthly rent, that is $12,000 annual rental income.
You can reasonably factor in the vacancy rate depending on the rental market.
Let's assume 7% vacancy rate, this yields $11,160 ($12,000 x 93%) annual income.
Operating expenses are the necessary expenses paid in order to operate the property.
Such expenses include property tax, insurance, and repairs.
A reasonable figure for this property is $3,000.
Dept payments are the mortgage payment if the property is purchased by borrowing money.
For a cash buyer, this element is completely eliminated from the formula.
With a 30 year 5.
5% loan of $120,000, your annual mortgage payment is $8,176.
With these figures, the cash flow is $11,160 - $3,000 - $8,176 = -$16.
As you can see, this property almost breaks even.
To have a positive cash flow, you can work on the three elements in the formula.
You do this by: Increasing Rental Income You can offer a lease to own option to collect additional income with this option premium.
Lease to own tenants tend to be longer term tenants and more financially sound.
Decreasing Operating Expenses Shop around for cheaper hazard insurance.
Shopping online is the best way.
Let those agents come to you with competitive offers.
If you have multiple properties or an automobile policy with the same insurance company, you are able to get substantial discounts.
Reducing your property tax liability is another way to reduce operating expenses.
Many counties have temporarily reduced property tax amounts due to decreasing property values.
You should also request to further reduce the tax amount if you think the assessed value is not properly adjusted.
It is often worth it to request a reassessment, because the process is usually very straightforward without taking much time and effort.
Collect a few transactions in your neighborhood to back up your number.
These transactions need to be around the time when the property is assessed by the county for a given tax year.
You can get those numbers from your realtor or zillow.
com.
Having a good handyman and good tenants are equally important as they both will save you a lot of money on repair expenses.
Consider purchasing a home warranty for piece of mind.
It is like an insurance that protects you from huge expenses in the case of a large repair or issue.
Decrease Payments You can either put more of a down payment on the property, increase the term of the mortgage, or reduce the mortgage rate.