What is the Average Cash Flow on Rental Property Investment?
Rental property investors can often create a great passive income from their real estate investment. This passive income is also known as a cash flow. Your cash flow is the amount of money you make from your investment property after deducting expenses.
A positive cash flow is always a good thing, but just how much cash flow can you expect from your rental properties? What is a good cash flow and what is considered not so good? What are the expenses you will need to cover that will cut into your cash flow and affect your bottom line?
Read on to learn the answers to all of these questions, and determine whether your potential rental properties are worth the investment.
What is the average cash flow on a rental property?
It’s hard to say what the average cash flow on a rental property is. A positive cash flow is a good thing, but what might be considered a good cash flow could be totally different from person to person. It also greatly depends on your location, strategy, type of property, cost of the property, and more.
With all that said, a rough estimate of the average return on investment for a rental property is 8%.
How To Keep a Positive Cash Flow in Real Estate?
It’s important if you are renting out your investment properties that you maintain a positive cash flow. Here are just a few of the things you should look at when considering ways to increase your cash flow:
- Consider hiring a professional property management company that understands the local market. They may also provide a network of handymen and suppliers.
- Perform seasonal maintenance on major items to help avoid major repairs. This should include heating, cooling, and plumbing systems.
- Decrease your vacancy rate by keeping tenant turnover as low as possible.
- Conduct tenant screening and background checks to qualify tenants.
- Make property improvements that will encourage tenants to pay a higher rent, such as energy-efficient appliances or up-to-date kitchen and bathroom designs
How Much Net Cash Flow Is Good For a Rental Property?
A positive cash flow is always a good thing when it comes to rental properties, but just how much cash flow should a property have? There is no straightforward answer to this question, but there are some factors you should consider.
Location
Location is the most important variable when it comes to real estate. The location of your property impacts your taxes, your interest rate, and any association fees.
Also, the legislation in the local area may impact what you can and cannot do with your property. When it comes to Airbnb, your cash flow can be restricted based on the local laws.
Be sure to thoroughly research the local area you are looking to invest in to determine whether you can make a positive cash flow from investing in properties in that area.
Property Type & Price
The type of property you are purchasing and the purchase price have a huge impact on your potential cash flow. There is a huge difference between a multi-family property, which has more than one rental unit, and a single family home. And the cost of the property has a direct impact on your bottom line. Be sure to calculate how much you can get in rent from the property and compare that number to how much the property cost to determine whether you will have a good cash flow.
Rental Strategy
The rental strategy you choose will impact your bottom line. An Airbnb rental typically brings in more income than a traditional rental property.
The 1% rule in Real Estate Investment
The 1% rule in real estate investment is simple: this rule states that the gross monthly rent from a home should be at least 1% of purchase price. You will experience greater returns the more income you receive relative to the property’s purchase price.
In order to determine whether a property is a good investment, you can use this formula to calculate:
- Gross monthly rent / Property price = X%
Simply determine what the gross monthly rent would be by researching properties in the area and divide that by your purchase price. This formula can help you determine which properties will be a solid investment and which you should avoid.
How To Increase the Cash Flow on Your Rental Property
Here are some simple and common ways to increase the cash flow coming from your rental property.
Increase Rental Income
A common practice is to increase your rental income annually by implementing a rate hike. Just be sure not to make the hike too extreme, as it may cause some tenants to leave.
Include Additional Income Streams
There are plenty of opportunities to charge a little extra here and there for additional amenities. This can include pet rent, which is when you charge an extra fee for allowing pets in your building. You can also charge extra fees for storage, laundry, parking, and offering a gym. Just be careful not to overdo it with the extra fees, or you may put off some tenants.
Other Rental Property Costs That Detract from Cash Flow
There are expenses associated with managing rental properties that will detract from your positive net cash flow. Here are the expenses you need to plan for that will affect your bottom line.
Utility Costs
The rental property owner must provide their tenants with basic utilities. The cost of these utilities depends on their usage. Typically, you can cover the essentials such as water, sewer, and trash, allowing your tenants to cover the rest. Offering additional utilities can be a great way to stay competitive.
Property Management
You don’t necessarily need to hire a property management company. If you are just getting started and don’t want to cut into your net cash flow, you can manage the property yourself. However, investing in property management can be a huge time saver that allows time for you to focus on growing your business. A typical property manager charges 10% of your rental income for services such as collecting rent, marketing available units, screening tenants, and overseeing repairs and maintenance.
Maintenance and Repairs
Your investment property will almost definitely need some sort of repairs and maintenance performed throughout the year. You’ll need to pay to fix broken plumbing or appliances or replace your roofing. You’ll also have regular seasonal expenses such as snow removal, garden maintenance, and window cleaning. All of this can easily cut into your cash flow. It’s important to set extra money aside to cover such expenses.
Operational Costs
Finally, don’t forget to consider your annual expenses, such as property taxes and insurance premiums. These can all cut into your cash flow and affect your revenue.
FAQs
How do you calculate gross cash flow in real estate?
To calculate your cash flow, you will want to deduct the cost of your rental expenses from your gross income. You can use the following formula:
Gross Income – Property Expenses = Cash Flow
What is good cash-on-cash ROI for a rental property?
Roughly, the average cash flow derived from rental property is 8%, but there are a lot of other factors to consider. A good cash flow can be subjective, because what one person is satisfied with may be quite different than the profit that someone else expects to earn from a property. It also depends greatly on the location and the cost of the property.
Is it OK to have a negative cash flow?
With your rental expenses varying month to month, you may find you occasionally have a negative cash flow. In general, you want to avoid having a negative cash flow as much as possible. There are steps you can take to cut expenses and increase your cash flow.
Sources
https://learn.roofstock.com/blog/how-much-cash-flow-good-for-rental-property
https://www.steadily.com/blog/what-is-the-average-cash-flow-on-a-rental-property
https://www.fortunebuilders.com/understanding-cash-flow-basics/
