One of the most common financial calculations you’ll want to understand is how to calculate the cash flow for your rental properties. While this is a simple concept, it’s importance cannot be overstated. Though some investors purchase property strictly for appreciation, we believe that bring mindful of cash flow is key to maintaining and growing a sustainable rental investment business.
What is positive cash flow?
A property is considered to be cash flow positive if the amount of revenue brought in through rent payments is greater than the amount of expenses that the property incurs. If the expenses exceed the amount of income, you have a negative cash flow property.
The primary difference between calculating cash flow versus Net Operating Income (NOI) is that with NOI, we only use the interest portion of the mortgage payment. With this calculation, we need to use the whole mortgage payment.
Calculating cash flow
We use a simple formula:
[Rent Payment] – [Monthly Expenses] = [Cash Flow]
We also need to ensure that we are accounting for maintenance on the property, as well as vacancy. Here is an example using a single-family home in Winnipeg. It was purchased for $250,000 with a 20% down payment and mortgaged for 25 years.
Rent $2,000
Expenses:
- Mortgage Payment $948
- Property Tax $200
- Insurance $150
- Maintenance $200
- Vacancy $200
Total Expenses: $1,698
Cash flow = $2,000 [Rent] – $1,698 [Expenses] = $302
Why cash flowing property is important
In this case, we have calculated the cash flow to be $302 per month. This way you are building equity through paying down the mortgage, and you also have additional cash to use. You can save it to fund a larger capital project or renovation down the road, pay down the mortgage faster, add it to the down payment for the next investment property or use it as passive income and work towards replacing your 9-5 active income.
Of course, this isn’t possible in all markets. Looking at prices in Toronto or Vancouver – even with the market cooling, you will most likely not be able to get this kind of return if buying at today’s prices. In markets like those, investors typically buy for appreciation over time. However, in this case you will have to contribute to the costs of owning this property on a monthly basis. While it is possible, and it can pay off in the long run, you have to be sure to budget for that additional cost along the added risk of the total costs being your responsibility in the event of vacancy.