Investing in real estate continues to be a great way to build long-term wealth and earn additional income each year. When you are looking to purchase a rental property, investors must understand the potential cash flow and how that matches their ROI goals.
Knowing estimated cash flow numbers is critical before closing on a new investment property. Today, our McKinney property management experts talk about understanding cash flow and how property owners can accurately forecast it for their next investment property.
There are plenty of financial advantages that can come with purchasing rental investment properties. These can include enjoying long-term value appreciation, monthly rental income, hedging against inflation risks, and building equity by paying down a mortgage payment each month. However, before an investor can experience these benefits, a property must generate sufficient cash flow. Understanding this metric is critical for any passive real estate investor!
Positive cash flow is the amount of money generated by a property each month after paying all expenses. Property owners can calculate this number by subtracting operating costs from rental income. Cash flow can be calculated on both an annual and monthly basis, and various factors need to be considered when running these numbers.
Calculating cash flow for your rental property can be simplified into income minus all expenses. However, various sources of revenue and expenses need to be considered when building out your formula to forecast for a potential property.
For example, if your monthly rental income is $1,200 and your expenses are $890, including your mortgage payment, insurance costs, property taxes, repair and maintenance costs, and vacancy reserves, your monthly cash flow is $310.
An excellent way to project potential revenue is by looking at local real estate listings and finding rental homes that help you answer the question: how much can I rent my house for. There are also online tools that you can use to determine a fair asking rent. A McKinney property manager can also run a rental market analysis to help determine the ideal monthly rent amount for a property.
Once you understand the revenue potential of your property, property owners should also consider the ongoing expenses to operate a rental property. These costs can include:
When real estate investing, work with a property management company to collect accurate estimates for these numbers, then run a cash flow analysis before closing on your next investment property!
Maximizing returns and cash flow helps investors find more success with rental properties! By following these tips, property owners can accurately forecast potential cash flow for their next investment property. If you’re looking into the North Texas area, let our McKinney property management experts help! RentHub has the experience investors need to buy, sell, and rent properties for optimal ROIs.
Learn more about returns with our free tool to Calculate Your Rental Property ROI!