One concept that is absolutely essential for any aspiring landlords and real estate investors to grasp before they make their step into rental properties, is that they need to know what rental property cash flow is and how they calculate it. After all, cash flow is quite literally the lifeline of a rental real estate investment.
Luckily, while the phrase may seem daunting, it is easier to calculate the average cash flow on a rental property than you might think. In fact, for many investors, you are destined to either invest in real estate solely for the cash flow, or not invest at all. You may think that this statement is a little strong.
Though, while strong, it is not untrue. Cash flow is a very strong force when it comes to rental properties. So strong, in fact, that it is essentially the main form of profit made from rental income.
What Is Cash Flow?
Put simply, real estate cash flow is the difference between the rental expenses and rental income of an investment property. Now that you have the definition, calculating cash flow is actually extremely straightforward. The formula is:
Cash Flow = Total Rental Income – Total Rental Property Expenses
Essentially, cash flow will be the direct tell for a real estate investor as to if his/her rental property is profitable and just how much money is being made. A positive cash flow property is one that is able to generate more income than it does expenses. Negative cash flow, on the other hand, has far higher expenses than it does income.
This serves as a loss for real estate investors. When discussing what good cash flow is, this will depend on both the investment and the investor. Continue reading to find out about what the average cash flow is on a rental property.
Donald Shurts, a Keller Williams Advisors Realtor explains "The amount that an owner of a rental property enjoys as profit is generally known as cash flow. There are mainly two types of cash flow: gross cash flow and net cash flow. The gross cash flow indicates all the direct income from the rental properties like late fees, application fees, rent from the tenant, etc. Another type of cash flow is net cash flow. After deducting all the important bills like electricity bills, tax, and servicing, the rest amount is known as net cash."
What Is a Good Cash Flow on a Rental Property?
Knowing how to calculate cash flow, it is clear that positive cash flow is considered good cash flow. The higher the rental property cash flow is, the more profitable it is for the landlord or investor. However, the reality of cash flow is all about a variety of different factors in real estate.
To effectively know what it is, you must consider the following variables.
1. Location
You have likely heard it many times, but location is the most important thing in real estate. This becomes even more true when you’re tiring to find the highest possible cash flow for rental properties. The same can be said when it comes to rental property expenses such as association fees, property taxes, and interest rates.
In addition to this, there are many other factors when it comes to the exact location. As an example, the short-term rental legislation of an area can restrict Airbnb cash flow for many reasons. On top of this, if the area has rent control laws, the potential for rental income can be limited.
All of this combined will affect cash flow. Theresa Raymond, a real estate professional and broker, explains "An idea of the average cash flow can be extracted by seeing the rental tab of different neighborhoods or regions. For example, in Mesa, Arizona, the annual cash flow for rental owners stands up at about $2,880 and while Detroit in Michigan produces about $5,616. After this, the modification of the house and facilities compared to other houses add up to the cash flow. But a good cash flow is when the return on cash is at least 10% and more".
Related Reading: The Most Landlord Friendly States
2. Property Type and Price
Another thing to take into consideration is the property type and price. Different property types can have a far different potential for earning rental income based on how many units can operate at one sole time. Many multi-family rental properties, for example, have more rental units than a single-family property has.
As a result of this, properties that can accommodate bigger families will have a higher potential for cash flow than single-family properties. The price of the property will also play a big role here. More expensive properties will obviously fetch a higher cash flow most of the time.
On the other hand, cheaper properties will fetch a lower cash flow. Dustin Fox, Owner / Realtor of Fox Teams explains "Depending on the housing situation, area, and economic stability the average cash flow will differ in amount. A house built and rented for families to live in a suburban area will have lower average cash flow than a house rented in the city. In addition, renovation, vacancy, and other things can affect the average cash flow.
If a unit provides 100$-200$ monthly as a profit, that is considered good cash flow. However, the rate will increase with the type of housing.. If the house is a duplex or triplex, it is better to consider 400$ as the minimum cash flow.
The total invested amount is an essential aspect for consideration. For example, if someone invests 1M$ in property and generates 500$ monthly, undoubtedly it is not a good investment. On the other hand, if you have invested 10,000$ in a property and the monthly rent is 500$, this is a very good rent. As a result, the average cash flow will observe positive growth.
Following the 10% rule is another way to calculate the rate of average cash flow. Divide the yearly net cash flow by the amount of money that was invested in the property. If the result is over 10%. Then this is a sign of positive and a good amount of average cash flow".
3. Rental Strategy
Much like the type of property, the type of rental investment strategy you adhere to will influence what good cash flow on a rental property is. For example, an Airbnb rental strategy will usually yield far more cash flow than traditional rentals will.
What is the Average Cash Flow on a Rental Property
To truly answer this question, you would have to consider your location, strategy, property type, price, and so much more. For example, what amenities does your rental property have? How many bathrooms are there?
As you can see, there are many variables. On top of this, what one investor may see as good cash flow, another may be entirely unhappy with. One thing is for sure though, all investors will be aiming for a positive cash flow at all times.
While we cannot give you a definitive answer because every investor will have different financial goals. We can give you a rough answer. The average cash flow on a rental property for most investors is an 8% return on investment, or ROI.
Others will strive for an ROI of 15%. There really is no magic number or right amount to ear.
Related Reading: How Many Rental Properties To Retire
The Bottom Line
Generating income from the cash flow on your rental properties can be an excellent investment. In addition to this, you may be able to use the cash flow to pay down any mortgages while also generating equity. Keep in mind, when it comes to real estate cash flow, calculating your expenses and rental property income will be your number one key to success.
Anything around 7% or 8% is the average ROI. However, if you’d really like to succeed, you should always aim higher at around 15%. Anything between these percentages will be seen as favorable cash flow properties as long as you have a current tenant and are receiving the expected rental income without having to outlay massive fees and expenses.
Overall, it is important to always be aware of what your income and expenses are going to be as what you see here is only a rough guide to the average cash flow on a rental property. You can also use a free gross rental yield calculator by simply searching that term on google.
This way, you will easily be able to find out what the rental yield is.
FAQs
According to the Rule, the gross monthly rent from a home should be at least 1% of the purchase price: Property price = $100,000 x 1% = $1,000 per month gross rent.
What is a good cash flow ratio for rental property? ›
The average cash flow on a rental property for most investors is an 8% return on investment, or ROI. Others will strive for an ROI of 15%. There really is no magic number or right amount to ear.
What is the average cash flow on a property? ›
In general, a good average cash flow on a rental property is one that generates a positive net income after all expenses have been deducted. A common benchmark used by real estate investors is to aim for a cash flow of at least 10% of the property's purchase price per year.
What is a good cash on cash rate for rental property? ›
Q: What is a good cash-on-cash return? A: It depends on the investor, the local market, and your expectations of future value appreciation. Some real estate investors are happy with a safe and predictable CoC return of 7% – 10%, while others will only consider a property with a cash-on-cash return of at least 15%.
What is the 2% cash flow rule? ›
The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.
What is a good return on a rental property? ›
A good ROI for a rental property is typically more than 10%, but 5%–10% can also be acceptable. But the ROI may be lower in the first year, due to the upfront costs of buying a home.
What is the 50% rule cash flow? ›
The 50% rule in real estate says that investors should expect a property's operating expenses to be roughly 50% of its gross income. This is useful for estimating potential cash flow from a rental property, but it's not always foolproof.
How much cash flow per month for rental property? ›
Using the 1% rule to calculate gross cash flow
According to the Rule, the gross monthly rent from a home should be at least 1% of the purchase price: Property price = $100,000 x 1% = $1,000 per month gross rent.
What is the cash flow percentage on a rental? ›
The 50% Rule states that a rental property's net cash flow should be at least 50% of the gross rent less the mortgage payment (P&I): Net cash flow = (Gross rent x 50%) – Mortgage P&I. ($12,000 gross annual rent x 50%) - $4,296 mortgage P&I = $1,704 per year.
What is considered a good price to cash flow? ›
A good price to cash flow ratio is anything below 10. The lower the number, the better the value of the stock. This is because a lower ratio indicates that the company is undervalued with respect to its cash flows.
Here are six ways you can increase cash flow from your rental properties.
- ADD NEW AMENITIES. As you research your local rental market, find out what amenities will bring you the best long-term returns. ...
- RENT OUT SPACES OR SERVICES. ...
- INCREASE RENT. ...
- DECREASE EXPENSES. ...
- CLAIM TAX DEDUCTIONS. ...
- SELL AND BUY A NEW PROPERTY.
Three to six months of fixed monthly expenses.
Another way is to total up all fixed monthly expenses and set aside 3 to 6 months' worth. This would include mortgage, taxes, insurance, and any other reoccurring expenses like property management, lawn care, or utilities.
What is a target cash on cash return for rental property? ›
Cash-on-cash returns are calculated using an investment property's pre-tax cash inflows received by the investor and the pre-tax outflows paid by the investor. Essentially, it divides the net cash flow by the total cash invested.
What is the cash flow 1% rule? ›
The one percent rule is a rule of thumb that helps real estate investors quickly determine whether a particular rental property is likely to generate positive cash flow on a monthly basis. The one percent rule is calculated as the gross monthly rent as a percentage of the purchase price of the property.
What is the proper cash flow formula? ›
The formula for operating cash flow is: Operating cash flow = operating income + non-cash expenses – taxes + changes in working capital The restaurant's operating cash flow therefore equals $20,000 + $1,500 – $4,000 – $6,000, giving it a positive operating cash flow of $11,500.
What are the mistakes in cash flow? ›
Some common mistakes that can lead to cash flow issues include forced growth, miscalculation of profits, insufficient planning for a lean period or crisis, problems collecting payments and more.
How do I maximize my return on a rental property? ›
13 Tips for Maximizing Rental Income as a Landlord
- Resident-Proof Your Property.
- Purchase The Right Insurance.
- Crunch the Numbers.
- Create An LLC.
- Make Use Of Tax Breaks.
- Make Use Of A Written Lease Agreement.
- Choose Your Property Management Company Wisely.
- Purchase A Home Warranty.
THE 4-3-2-1 APPROACH
One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
What is the 70% rule? ›
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. The ARV of a property is the amount a home could sell for after flippers renovate it.
What is the 75 25 rule finance? ›
"the investor should never have less than 25% or more than 75% of his funds in common stocks."
Any rental income you received as a property owner is taxable and should be reported. As a general rule, rental income can include rent payments, security deposits, leasing fees, and any other cash flow generated from a given property.
Does rental cashflow get taxed? ›
When performing cash flow calculations for real estate, remember to factor in what you'll have to pay in taxes on that income. Generally, net rental income is taxed at your ordinary income tax rate. So if you're in a higher tax bracket, that could mean paying more in taxes on rental income.
Is cashflow on rental property taxable? ›
While cash flow is not taxed, it can impact taxable income. For example, a business with a positive cash flow can invest in assets or pay off debts, reducing taxable income. Similarly, if an individual has a negative cash flow, they may be able to deduct certain expenses or losses, which can also reduce taxable income.
Which cash flow is good? ›
If a business's cash acquired exceeds its cash spent, it has a positive cash flow. In other words, positive cash flow means more cash is coming in than going out, which is essential for a business to sustain long-term growth.
What is average price to free cash flow? ›
The price to free cash flow is a metric used to evaluate and compare a firm's market price of a single share with its per-share price of free cash flow (FCF). This metric is much like the evaluation metric of price to cash flow.
What is an example of a price to cash flow? ›
Example of the Price-to-Cash Flow (P/CF) Ratio
The market capitalization is $10 x 100 million shares = $1,000 million, so the ratio can also be calculated as $1,000 million / $200 million = 5.0, which is the same result as calculating the ratio on a per-share basis.
Should I keep a property with negative cash flow? ›
Holding a negative cashflow property only makes sense if you believe the home will become profitable — and you can afford to hold it until it does. Deciding if negative gearing is right for you means assessing both your personal financial situation, and the realities of your home and market.
What is the 10 percent rule for rental property? ›
Buy 10% Under the Market Price
This rule is basically to avoid paying the sticker price. Instead, look to buy at least 10% under the listed price. In real estate, there's a saying that most of the return is made at the time of purchase. Meaning that most of the money is made on the purchase rather than rental income.
What is the rule of thumb for rental amount? ›
A popular standard for budgeting rent is to follow the 30% rule, where you spend a maximum of 30% of your monthly income before taxes (your gross income) on your rent. This has been a rule of thumb since 1981, when the government found that people who spent over 30% of their income on housing were "cost-burdened."
How much money should you have before investing in a rental property? ›
How Much Down Payment Do You Need to Buy Investment Property? Lenders typically have stricter guidelines when it comes to rental properties. Though you can buy a primary home with as little as 3% down, most borrowers need to put down 15% to 20% to buy a rental property.
An equity multiple of less than 1.0x means that you'd be getting back less cash than you invested throughout the hold period. So, very simply, you want to see an equity multiple greater than 1.0x. That means you are getting back more cash than you invested.
What is a good cash-on-cash for Airbnb? ›
So generally, getting at least a 3% cash on cash return is already considered acceptable in most markets. A good cash on cash return rate ranges from 8% to 12%.
What is the cash on cash return rule of thumb? ›
The first rule of thumb is Cash on Cash Return. A cash on cash return is simply the return an investor receives on the amount of “cash” that is invested in the deal. To calculate this figure, take the annual cash flow from the property and divide by the TOTAL cash invested.
What are the 3 types of cash flows? ›
There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company's cash flow statement.
What are the three rules of valuing cash flows? ›
the frequency of the cash flows, the number of cash flows (t), the rate at which time affects value (r).
What is a typical cash flow multiple? ›
Common Multiples
Service businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Food businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Manufacturing businesses: 3.0 to 5.0+ (i.e., cash flow x 3.0-5.0+ multiple) Wholesale businesses: 2.0 to 4.0 (i.e., cash flow x 2.0-4.0 multiple)
Does cash flow mean profit? ›
So, is cash flow the same as profit? No, there are stark differences between the two metrics. Cash flow is the money that flows in and out of your business throughout a given period, while profit is whatever remains from your revenue after costs are deducted.
What usually affects cash flows the most? ›
Late Payments from Buyers
This is one of the biggest cash flow issues affecting businesses. As businesses need to pay expenses, a delayed payment reduces cash inflows while adding pressure to pay bills on time.
What affects cash flow the most? ›
Changes in Working Capital
The most significant uses of cash from operating activities are the changes in working capital, which includes current assets and current liabilities. Increases and decreases in current assets and liabilities are reflected in the cash flow statement.
What is a bad cash flow statement? ›
Negative cash flow is when your business has more outgoing than incoming money. You cannot cover your expenses from sales alone. Instead, you need money from investments and financing to make up the difference. For example, if you had $5,000 in revenue and $10,000 in expenses in April, you had negative cash flow.
A good price to cash flow ratio is anything below 10. The lower the number, the better the value of the stock. This is because a lower ratio indicates that the company is undervalued with respect to its cash flows.
What is the best rental to income ratio? ›
As a general rule of thumb, landlords should aim for a rent-to-income ratio of no more than 30%. Meaning the tenant should earn at least three times the rent amount.
What is a good cash flow position? ›
By dividing current assets by current liabilities, you reach a current ratio of 2:1. A ratio over 1 indicates a company has enough cash for continued operations. With a ratio of 2:1, Company A has a strong cash position.
What is a healthy cash flow margin ratio? ›
A cash flow margin ratio of 60% is very good, indicating that Company A has a high level of profitability.
How do you determine good cash flow? ›
A basic way to calculate cash flow is to sum up figures for current assets and subtract from that total current liabilities. Once you have a cash flow figure, you can use it to calculate various ratios (e.g., operating cash flow/net sales) for a more in-depth cash flow analysis.
Do you pay taxes on cash flow from rental property? ›
Any rental income you received as a property owner is taxable and should be reported. As a general rule, rental income can include rent payments, security deposits, leasing fees, and any other cash flow generated from a given property.
What is minimum cash flow? ›
Minimum Cash Flow means net profit after taxes plus depreciation and amortization.
Is 50% of income too much for rent? ›
A popular standard for budgeting rent is to follow the 30% rule, where you spend a maximum of 30% of your monthly income before taxes (your gross income) on your rent. This has been a rule of thumb since 1981, when the government found that people who spent over 30% of their income on housing were "cost-burdened."
Is 30% of income on rent too much? ›
The 30% rule of thumb for rent recommends spending no more than about one-third of your monthly income on a rent payment each month. National housing guidelines have contributed to the 30% rule's use as a standard of rental housing affordability.
What is the average US rent to income ratio? ›
The rent-to-income ratio was calculated by comparing the national median household income, $71,721, with the average monthly rent, $1,794, for 2022. The current 30 percent figure is an increase from 28.5 percent in 2021, and from 25.7 percent in 2020.
