What is Rental Cash Flow?
Rental cash flow is the money left over each month after collecting rent and paying all property expenses. Think of your rental property as a money tree—cash flow is what it produces after you've covered all the costs.
Understanding rental cash flow is crucial because:
- It tells you whether your investment is profitable
- Good cash flow helps cover unexpected expenses
- It provides steady passive income
- It guides informed real estate investment decisions
How to Calculate Rental Cash Flow
The formula for rental cash flow is:
[\text{Cash Flow} = (\text{Monthly Rent} \times \text{Occupancy Rate}) - \text{Mortgage} - \text{Taxes/Insurance}]
Where:
- Monthly Rent is the average amount you charge each month
- Occupancy Rate is the percentage of time the property is occupied (typically 90-95%)
- Mortgage is your monthly payment including principal and interest
- Taxes & Insurance is your combined property tax and insurance payment
Calculation Example
Given:
- Monthly Rent: $1,800
- Occupancy Rate: 95%
- Monthly Mortgage: $900
- Taxes & Insurance: $300
Step 1: Calculate rent adjusted for occupancy:
[1{,}800 \times 0.95 = 1{,}710]
Step 2: Subtract mortgage:
[\text{1,710} - 900 = 810]
Step 3: Subtract taxes and insurance:
[\text{810} - 300 = 510]
Your rental cash flow is $510 per month.
Pro Tips to Boost Cash Flow
- Increase Rent: Check market rates and adjust accordingly
- Reduce Costs: Optimize maintenance and negotiate better service contracts
- Lower Vacancy: Implement effective marketing to retain tenants longer
- Refinance: Lower your interest rate through mortgage refinancing
Cash Flow Summary Table
| Item | Amount |
|---|---|
| Monthly Rent | $1,800 |
| Effective Rent (95% occupancy) | $1,710 |
| Mortgage Payment | -$900 |
| Taxes & Insurance | -$300 |
| Monthly Cash Flow | $510 |
| Annual Cash Flow | $6,120 |
Knowing how to calculate rental cash flow guides you in maximizing profits and minimizing risks with every property you consider.