How To Accurately Calculate Rental Property Cash Flow

For many people, the idea of owning rental properties is incredibly attractive, with tenants paying the mortgage while you get monthly profits. However, there is a lot more that goes into being a landlord. You have to account for many expenses - including unexpected costs that can blow a hole in your savings.

Understanding cash flow is vital to making smarter decisions about rental properties and investing. Cash flow is how much profit you make after expenses (including mortgage costs and contributions to a reserve fund). If your estimated cash flow isn’t high enough, you may take certain steps to increase it - like working with a skilled property management company to reduce turnover in tenants and decrease the number of months that your rental property is empty.

Based in Lithia, Eaton Realty offers a full range of real estate services throughout Hillsborough County, Florida. In addition to helping clients buy and sell properties, we also offer comprehensive property management services. Contact us to schedule a consultation with a member of our team to learn how our services can help you increase your rental property's cash flow.

Looking To Improve Rental Cash Flows? Speak With Our Property Management Team › 813-672-8022

Calculating Rental Property Cash Flow

Cash flow is the money that a landlord earns from a rental property. In simplest terms, it is income minus expenses. Understanding cash flow is important to be profitable as a landlord.

A strong cash flow is particularly important for property investors wanting to increase equity and build financial stability. It will allow you to pay off a mortgage and cover any expenses that arise. It is also an important tool for determining if purchasing a piece of property is a wise investment.

Analyzing your rental property cash flow is necessary to determine if your rental property is profitable - and how much you make from your rentals each month. The data gleaned from a cash flow analysis is also valuable when making decisions about your investment property, such as whether to increase the rent. The process is relatively simple but will require some documentation to ensure your numbers are accurate.

Determine Gross Income

The first step in the process is to determine your projected gross earnings for your rental property or properties for a set period (typically a year). Gross income is all the money you will receive before deducting any expenses. You can find this information in your bank records and any spreadsheets you maintain to track rental income, which can be used to estimate future cash flow.

Estimated gross cash flow should include the following:

• Gross rental income: You can determine this number by simply multiplying the number of occupied rental units by the monthly rent for each. Then, multiply that number by the number of months that these units were occupied. For example, if you own a duplex in the Tampa area and both sides will be rented all year at a rate of $2,200 a month, then the gross rental income is $2,200 x 2 x 12, or $52,800.
• Additional sources of income: If you charge an application fee or have tenants pay things like a monthly pet fee, this should be included here. Remember: do not include your tenants’ security deposit as part of your cash flow analysis. Under Florida law, security deposits must be held in a separate account for the tenant's benefit.
• Vacancy rate: one of the most critical aspects of determining rental property cash flow is the vacancy rate. A landlord may still have vacant rental units despite their best efforts. This fact must be considered when determining an estimated gross cash flow. The vacancy rate is the percentage of time a property was vacant during the year. For example, if you own a 10-unit apartment building and expect it to be vacant 10% of the year, you’d deduct 10% from the gross rental income.

With these numbers, you can calculate the estimated gross cash flow easily. Simply add the gross rental income and the additional income, and then subtract the vacancy rate. For example, if you anticipate $40,000 in rental income, no additional expenses, and a 15% vacancy rate, then your estimated gross cash flow will be $34,000 ($40,000 - 15%, or $6,000).

Calculate Operating Expenses

The second step is to determine your projected gross operating costs and expenses. Having an investment property comes with certain expenses, many of which may change from year to year. For example, property maintenance fees may go up along with your insurance premium.

You can use past year’s expenses to get a rough idea of your expenses moving forward. Typical expenses may include:

• Property management fees, including any leasing fees for screening applicants, finding tenants, and marketing the property.
• Maintenance costs, such as regular lawn care, pool service, and any repairs that need to be performed over the course of the year. These expenses can vary significantly based on factors that are often outside of a property owner’s control. For example, a tropical storm or hurricane could cause significant damage to your rentals - which could mean higher than usual repair expenses for a given year if the damage isn’t covered by insurance.
• Insurance for the property, which is usually a specific policy for landlords (different from homeowner’s insurance).
• Property taxes, which are usually fairly consistent from year to year.
• Homeowners’ association (HOA) dues, if any.
• Contributions to your reserves, which is money that landlords should set aside each year for capital expenditures (improvements or major repairs to the property). It is essential to set a chunk of money aside each year into an account in case a major expense (like a new roof) arises.

Again, these numbers may change from year to year. Adding them together determines your typical gross operating expenses.

Calculate Net Operating Income

Once you have your gross income and expenses, you can perform the third step - calculating your net operating income. This involves simply subtracting gross operating expenses from gross income. For example, if you have an estimated gross income of $50,000 and gross expenses of $12,000, your net operating income will be $38,000.

Remove Debt

The fourth step in the process is to subtract any debt from net operating income (NOI). Most landlords take out a mortgage to purchase a rental property. To determine net cash flow, you will need to subtract any mortgage payments and related expenses (such as mortgage insurance) from NOI.

For example, if your mortgage payment is $1,500 per month, then your debt service would be $18,000 per year. To determine your cash flow, you would subtract this debt service number from your NOI. In the example above, if your NOI is $38,000 and your debt service is $18,000, then you’d have a projected annual net cash flow of $20,000 - or $1,666 per month.

Once you have these numbers, you should take some time to analyze them. At a minimum, your net cash flow should be enough to offset expenses. Without a good cash flow, you could risk going into more debt to make mortgage payments - or even face foreclosure.

How to Increase Cash Flow

For many landlords, expenses are relatively fixed once they purchase a property. There is only so much that you can do to trim certain expenses - like property taxes. There is also the reality that expenses have shot up due to inflation and other factors (like insurance premiums).

There may be some things that you can do to decrease expenses. For example, if you are covering utilities for your tenants, you may change the lease term so that future tenants pay utilities. You can also take on some tasks, like lawn mowing or doing routine maintenance. Of course, these things take time - and not everyone is able to perform maintenance or do yard work.

Alternatively, you can consider different ways to increase cash flow without cutting costs. Some options to consider include:

• Do a better job screening tenants to reduce frequent turnover and property damage. Having a long-term tenant is a great way to reduce vacancy rates and the costs of finding new tenants. Long-term tenants are usually less likely to cause trouble or to miss rent payments. Spending time upfront to screen tenants can help you find renters who will give you a more consistent rental income.
• If you are carrying a mortgage, you may want to refinance the loan if interest rates drop. Refinancing can help you lower mortgage payments, which increases cash flow.
• Increase the rent. Landlords often set a rent rate for a property and then don't change it for years - even when their costs are increasing. There are some risks with raising the rent, such as losing tenants who cannot afford it. However, if the rental price is backed by market research or justified by the property’s amenities, it makes sense to increase it accordingly.
• Appeal your property taxes. Your property taxes aren’t necessarily set in stone - it may be possible to get them reduced by filing an appeal. Consult with an attorney to determine if it may be possible to successfully appeal your property taxes. You should then consider the costs of the appeal (including lawyer’s fees) when deciding if it makes sense to appeal. Remember that you will pay legal fees once - but you’ll pay property taxes every year for as long as you own the property.
• Shop around. There are certain costs that you may be able to reduce by doing some homework. You might find an insurance company that offers better rates, or a discount for bundling your policies. You may also find a property maintenance company that does an excellent job for a lower cost.

While it may seem counterintuitive, spending some money on your rental property can help you increase your cash flow over time. This is particularly true when you work with a seasoned property management company such as Eaton Realty.

Although you will pay a monthly fee to the company, the benefits are numerous - particularly regarding cash flow and freeing up your time. A property management company understands the local market and will help you price your unit appropriately to get it rented quickly - and reduce vacancy rates. They can also thoroughly screen tenants to ensure you get high-quality renters who want to stay at your property for the long term, reducing turnover costs.

At the same time, your property management team will handle all property maintenance and other tenant requests, which is beneficial in several ways. Routine maintenance—and responding to issues promptly—will not only keep tenants happy (and more likely to stay long-term) but also prevent bigger problems that often result from deferred maintenance. If your rental property is vacant, your property management company will make any necessary repairs, take photos, and market it to get a new tenant in quickly.

In addition, a property management company will handle all of the financials, including regular cash flow reports and documentation for things like tax deductions. They can also offer advice on maximizing profits and let you know if any exciting rental properties come onto the market for purchase.

Simplify Property Management with Eaton Realty

Owning rental properties can be profitable - particularly once you can pay off the mortgage. Digging into the numbers is an important part of being a landlord. You have to know how much you’re spending and how much you’re bringing in each year to fine-tune your business.

At Eaton Realty, we work with buyers, sellers, renters, and landlords throughout the greater Tampa region. With more than 20 years of experience in West Central Florida real estate, we provide strategic advice to our landlord clients. We can assist you with every aspect of buying, managing, and selling investment properties in Hillsborough County.

To learn more about our real estate services, fill out our online contact form or give us a call at 813-672-8022 to talk to a team member.

The information disclosed above does not constitute legal or financial advice. Use this information at your own discretion and consult a legal or financial professional for further guidance.

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