How to Make Sure Your Property Cash Flows
03 Apr 2024
Posted By Admin
Do you want to invest in a property, but are still unsure how to predict its profitability? You need to do adequate property cash flow analysis to know the financial viability of a property. If you are planning to rent out a property, then it’s not only about the rent you will receive- it’s about considering the complete financial picture. This blog will let you do a comprehensive cash flow analysis to make informed investment decisions.
Cash flow analysis: A smart rental investment
While considering rental property as an investment, you must do a cash flow analysis. Such analysis is not only about numbers, but it's about considering the entire financial health of the property. So what do we mean by cash flow, and why must you think about it as a rental property investor?
Cash flow analysis in rental property investment
Through a cash flow analysis tool, you can know the overall profit from your rental property. It includes the net amount of cash your property will produce by considering all income sources and expenses. Such in-depth analysis will give you a clear idea about whether your property will give you money each month or it is simply a drain of your money.
Cash flow analysis components
Gross rental income
Gross rental income is the start of your analysis. It determines your property’s potential income specifically from rent payments. You must research the local rental market to know the realistic rental expectations.
Operating expenses
This cost is involved to manage and maintain your property. This cost includes property management charges, insurance, maintenance cost, property tax etc. You must be honest in estimating the cost by making a note of all the expenses associated with the property. Mortgage payment: If you are the financier of the property, you must consider the monthly mortgage payment. Property tax and insurance: Never overlook this money, as it is a critical cost. Maintenance and repairs: You must include the cost you spend in the maintenance and repairs of the property. Property management fees: Include the fees of property management companies, if you are taking their help. Utilities: If the tenant has not covered the utilities, then you must include that cost.
Consider capital expenditures
Capital expenditure occurs less frequently, but you should include this cost in your analysis. For instance, you may invest in a new roof or HVAC system which needs to be included.
Net operating income (NOI)
This is the subtraction between rental income and operating expenses. Through NOI you can estimate the profit from your property before including the financing cost.
Cash Flow
Cash flow is the heart of your profit calculation. Cash flow is calculated by subtracting debt service (like mortgage payments) from NOI. If the cash flow is positive, it indicates that your property is generating profit and thus it will be a sound investment for you. On the contrary, a negative cash flow will indicate that your property is not financially viable.
Assess cash on cash return
To get an in-depth analysis you must calculate cash on cash return. This measurement will let you know the actual return on the invested cash. Divide the yearly pre-tax cash flow with the overall invested cash in the property.
Regular review and adjustment
Cash flow analysis is not a one-time activity. You must adjust and review your analysis to know the changes in rental income, expenses, and market conditions.
Why cash flow analysis matters
Risk assessment: This will let you know the risk of your property. If your property has a slim or negative cash flow, then it might be riskier for you. Investment strategy alignment: As per your investment goal, cash flow analysis will let you evaluate whether the property matches your long-term financial objectives or not. Financing decisions: By knowing your cash flow, you can make decisions regarding financing the property, including the loan terms and types.
Cash flow analysis for successful investment
A property investment never becomes successful with guesswork- it requires data-driven decisions. Through cash flow analysis you can know the financial performance of the rental property. By understanding all the factors of cash flow analysis, you can make informed decisions to meet your financial goals.
Final Takeaway
If you are a real estate investor, then you must do a thorough cash flow analysis of your rental property. This will help you understand the expected returns along with the risk associated with it. By following the above steps, you can make informed decisions backed by financial understanding. So, do you want to invest in a rental property and need some guidance? Our SimpleRent loan program can help you in your investment journey. Contact us today to learn more about SimpleRent and how it can benefit you in your investment pursuits.
