How to Calculate Cash Flow in Real Estate?

I learnt about cash flow in real estate when I heard a few of my friends talking about it. They had been talking about how to calculate cash flow in real estate and I was just really curious about it too. They told me that investing in cash flow is a great way to generate passive income. You just need to rent out your property to one or more tenants and earn a monthly payment in the form of rent. But they also told me a few more interesting things about maximising profits through cash flow in real estate. 

The movement of money into and out of a business is referred to as cash flow. When talking about real estate cash flows, we refer to both the money that the property generates and the money that is spent in connection with the property. Investments in real estate can produce either positive or negative cash flow. A property has positive cash flow when its income exceeds its costs. On the other hand, when expenses outweigh income there is a negative cash flow.

How to calculate cash flow real estate?

Understanding a few essential facts about the property is the first step in calculating cash flow in real estate. We need to know the property's gross rental income to calculate the cash flow. But there are a few major things to keep in mind like, what the property's total expenses are, and if there are any debts associated with the property.

Gross rental income is the amount of money generated by a property before costs like mortgage payments are reduced from it. Rent is usually the primary source of income when we are determining the cash flow from residential rental properties. But, based on the terms of our lease agreement, we may also charge renters pet fees, late fines, or other fees to recoup some of our costs.

We are going to count all of the costs associated with owning the property as expenses, like;

• Utilities

• Property taxes

• Maintenance and repairs

• Insurance

• Property management fees (if you pay someone else to manage the property for you)

• Advertising

• Legal and professional fees (ie., eviction expenses)

• Business licenses you may be required to hold to rent out the property

We must also include the vacancy rate of the building. The vacancy rate is nothing but the total amount of time in a year a particular property remains vacant and generates no revenue at all. So, this vacancy rate is added up and then it is divided by the potential rental period, and multiplied by 100 to determine the property's vacancy rate.

Suppose a particular property was vacant for 16 weeks in a year. Ideally, it could have been rented for 52 weeks in a year, so it will have a vacancy rate of 16/52x100 which is 30.76%. This vacancy rate can be regarded as an operating expense when the property is being rented out.

Now that we have determined the vacancy rate or the gross income and outgoing costs, we will now determine the Net Operating Income or NOI. The difference between income and expenses is considered the NOI in cash flow real estate. That is the reason why the outcome of this difference is said to be the operating cash flow. Any debt that might be connected to the property is not taken into consideration. You would deduct debt service from net operating income to get the net cash flow after debt service is taken into account.

I hope now you understand how to calculate cash flow in real estate.