Mastering Cash Flow for Financial Success

To continue my series of posts on understanding real estate terms, I’d like to take some time to explain cash flow.

Cash flow can be summed up in broad terms with one equation. It is

Income - Expenses = Cash flow

Let's go ahead and break this down a little further. The income in the first part of the equation is money that is received from a property. Most often this is the money paid by the tenant for rent each month. However, there can also be other forms of income such as charging for the use of laundry machines, extra storage, or even to park a car in a covered and protected place. It is important to add up all forms of revenue generation and this will be your income for the property.

The second part of the equation can be a little more tricky. Most people who are unfamiliar with real estate investing assume that the only expense a landlord has to pay is the mortgage on the property. These people would be somewhat right in that the mortgage usually is the largest expense on the property but there are actually numerous other expenses to account for. A screenshot below of my own rental analysis spreadsheet lists all of the expenses that you should account for when analyzing a deal. Take a look:

After you have totaled up all of the income and all of the expenses, you want to go ahead and subtract the expenses from the income. This will give you your cash flow number. You may be asking “What is a good cash flow number?” Unfortunately, the answer to this question is that it depends. You’ll always want this number to be positive unless you are investing for a certain reason which is honestly beyond this post. The amount of the cash flow is also important but what truly matters is the CoCROI as it is impacted greatly by cash flow. I’ll cover this more in another post but to briefly go over it, you wouldn’t want a cash flow of $100 if you invested $1,000,000 into the deal. This would have a bad CoCROI and would be a bad investment overall.

I hope this helps make cash flow a little easier to understand. If you have any questions on this topic, feel free to reach out!