What is Cash Flow
Cash flow in real estate investing is the difference between monthly rental income and monthly operating expenses. Cash flow is usually associated with rental properties. When a property is said to have a good cash flow, they are referring to a good positive cash flow.
When you are buying a rental property you have to do a financial analysis that is going to determine whether the property will cash flow or not. The first thing you need to do is you want to analyze all the expenses associated with owning that property.
Now, this is where it gets tricky because a lot of people ignore certain expenses.
The basic expenses are going to be your mortgage payments, your tax payments, and your insurance payments.
Maintenance
Those are the three that you have to pay no matter what. Here’s where it gets tricky. A lot of people don’t put in any estimate for things like maintenance.
If you own a rental property, no matter where it is, no matter how new it is, you are going to have maintenance.
There are going to be some things that you are going to have to do with that property to maintain it, as a property owner.
Property Management
The other thing is property management. A lot of people ignore that expense because they say: well, I am going to manage that property myself. And that’s fine and good. Especially if you are only going to ever own three or four or five properties, you could probably do that property management yourself. But what it also means is if you don’t put any money in there that you are working for free.
Because any time that you spend going to that property, you are not given it any value.
This makes your property look good because now it may seem like it’s cash-flowing.
Vacancy
The other thing you want to put in your expenses is an allowance for vacancies. No matter how good you are at finding tenants, no matter how good your tenants are, you will have some vacancy in your property at some point.
Summary of Expenses
So those are the three different expenses that I see people leave out when they do a financial analysis.
They grab the first three which are the mortgage payment, the tax payment, and the insurance payment, and then they include those in their financial analysis. But they just ignore the maintenance costs, the property management costs, and the vacancy costs.
Once you put all those in your analysis, then you have what I consider all the expenses required to own a rental property and to do a proper cash-flow anaysis.
Cashflow
Now you can look at all the expenses and you can calculate the difference between the rent and those expenses. This is your real cash flow.
Cash flow can be anywhere from $20 a door or even $500 a door. A door means per unit. The reason they say a door is because sometimes there is more than one unit in the property.
If you have a duplex you have two doors on the property; on a fourplex, you have four doors; and on an apartment building have many doors. You could have, 10, 20, or even a hundred or more doors in an apartment.
So make sure that your property cash flows.
The other thing I see is that people will say: “well, it doesn’t cash flow right now, or I can’t find properties in this area to cash flow”. They start tweaking the numbers to try to make it look like it’s cash flowing. Or they say, “well, the properties really appreciate in this area So I’m going to hold onto the property until it does cash flow”.
I would never do that.
I want you to make money on my properties the day I buy it.
You want to make sure your cash-flow calculation includes all your expenses so do your due diligence on those expenses and make sure your property is cash-flowing right from the start.
