Why Rental Property Cash Flow Analysis Is So Important

Investments are made to make a profit. If you own a rental property, you must ensure that the numbers involved reflect the fact that you are making money, i.e. what you collect from the rental income covers the expenses and leaves a residual amount as a profit. Rental property cash flow analysis will give you an idea of the income and costs associated with the property.  

To understand this, the term “cash flow” needs to be understood. Basically, it is the difference between the rental property’s income and operating expenses. Operating expenses include financing costs, insurance, repairs, taxes, utilities, and repairs. Rental income is the rent and other fees such as late payment charges and any other related fees.   

A rental unit is said to have a positive cash flow (which is the aim of all rental units) when the rental income exceeds the operating expenses, and a negative cash flow occurs when the operating expenses are greater than the rental income.  

Steps to calculate rental property cash flow:  

1 – Forecast gross income
Gross income is the rent and any other source of income related to the rental property such as late payment charges, parking fees, application fees, pet rental fees, laundry fees etc.   

2 – Forecast gross operating expenses
Gross operating expenses are any costs incurred to operate the rental property such as finance costs, taxes, utilities, property management fees, maintenance costs, insurance,   

3-Calculate net operating income (NOI) before financing
NOI is how much you make after expenses. The formula for NOI = gross rental income-gross operating expenses  

4-Calculate the net cash flow after financing
Once the financing is in place, a net cash flow figure can be obtained that tells you how much you are actually making on the property.  

Ways of increasing cash flow  

Efficient property maintenance – keeping the property in good order by regular scheduling routine maintenance, quickly fixing issues and making attractive upgrades will attract tenants and improve cash flow  

Long term tenants – tenants who stay for long periods will guarantee a consistent source of rental income and reduce vacancy rates. Long term tenants are also less likely to cause problems and miss rent payments.  

Add income sources – there are ways of increasing revenue without raising rent, such as increasing laundry fees, parking fees, application fees, administration fees, move in and move out fees.  

Replace appliances – old and inefficient appliances can increase utility costs and can be expensive to repair. New eco-friendly appliances can save on energy costs and attractive warranties.  

Expenses that can reduce cash flow:
  • Property management fees
  • Leasing fees
  • Insurance
  • Repairs and routine maintenance costs
  • Landscaping
  • Vacancy expenses
  • Capital repairs
  • Advertising costs
  • Office, payroll and administrative expenses
  • Utilities – water, garbage etc
  • Appliance replacement costs

Rental income shows that money is continually flowing in and out of the company. This is known as “fluid” cash flow showing a level of liquidity that is advantageous in the eyes of banks and lenders. So it is important to have a good handle on the cash flow situation.  

We have a dedicated division for rental and property management – VIRANI RENT + MANAGE. Contact us if you have a property that requires professional management.
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