How Much Cash Flow Do You Need on Rental Properties?
If you’re looking to invest in a rental property, you should first understand how much cash flow is needed to properly manage and maintain this type of investment. While every investor has their own investing goals, making sure that your rental property has a steady cash flow is essential if you want to be able to hold on to the investment for an extended period of time without issue and if you want to scale your portfolio. Here’s a closer look at the amount of cash flow a rental property should bring in.
What Is Cash Flow?
Cash flow refers to the amount of income that a property is able to generate once expenses are taken into account. When a property generates high cash flow, investors should receive high returns each month. If you want to profit from your investment, your rental property will need to have a good and stable cash flow.
There are two different types of cash flow, which include gross cash flow and net cash flow. Gross cash flow refers to the amount of income that’s collected from rent as well as additional fees that tenants pay, which can include application fees and late fees.
In comparison, net cash flow refers to the money that remains once all expenses have been deducted from your gross cash flow. Even though your net cash flow will invariably be lower than your gross cash flow, any money that remains can be considered profit.
How to Calculate Property Cash Flow
First, you should identify what your rental property’s cash flow is. Many investors consider cash flow to be the rent they receive minus insurance, taxes, and mortgage payments. Make sure that vacancies and maintenance costs are factored into your cash flow as well. Once you identify how much rent payments have been received for a given month, you should then subtract:
- Insurance premiums
- Mortgage payments
- Maintenance costs
- Property management expenses
The final result from this calculation will be your net cash flow.
Factors That Could Influence Cash Flow
Cash flow can be determined by many different factors, which include everything from property location to financing. The location of your rental property will determine how much you’re able to charge for rent. If the property is situated in a competitive housing market, you may be able to charge high rents.
Keep in mind that each location has its own advantages and disadvantages. When determining if a location is ideal, you should take interest rates, homeowner association fees, and property taxes into account. The type of rental you invest in will also play a role in what the property’s cash flow is. Apartment complexes should have more cash flow than rental homes.
As for financing, the terms of your loan can dictate what your property’s cash flow will be in the future. For instance, a high interest rate can reduce your monthly cash flow. The same is true with private mortgage insurance, which you can avoid if you make a down payment that’s high enough. The necessary down payment is usually around 20% or higher for most lenders. If you want to improve your financial situation before requesting a loan, you can increase your credit score by making consistent payments and by paying off debt.
How Much Cash Flow Is Necessary for a Rental Property?
There’s no strict answer for how much cash flow is necessary for a rental property. If you purchase a rental home for $100,000, you may want to bring in net cash flow of $400-$600 per month for consistent profits. Many investors aim to receive cash flows of 1-2% of the total property price every month. You can increase the likelihood of receiving a high cash flow by properly managing your property and by making sure that any vacancies are filled as quickly as possible.
Rental properties make for great investment opportunities if you have the capital needed to purchase this investment at a reasonable price. If you want to obtain a good cash flow on your rental property, you should strive for cash flow that amounts to 1-2% of the rental property price. When calculating your cash flow, make sure that any monthly expenses are deducted from the rents you collect.
In the end, only you (the investor) can decide how much cash flow is sufficient for your investment goals.