Cash Flow

What is cash flow for rental properties? Why is it important? How is it calculated? And cash flow reports for your investments.

That’s what we’ll cover here.

First, what is cash flow for rental properties?

Income from your property might include:

• Rent from properties
• Option fees on properties
• Additional mid-month payments
• Utility bill back
• Income from onsite amenities like laundry or internet
• Appliance rent

IMPORTANT NOTE: We do not typically consider Cash Flow from Depreciation™ as income for cash flow. When we include Cash Flow from Depreciation™ we instead call that True Cash Flow™.

Your property may not have every one of these sources of income. For example, unless you have a multi-family property, you’re not likely to have income from on-site laundry. And, unless you’re offering your property on a lease-option or lease-purchase to a tenant-buyer, you’re likely not going to have option fees or a mid-month payment as a sources of income.

Expenses might include:

• Mortgage principal on any loans
• Mortgage interest on any loans
• Private Mortgage Insurance
• Property taxes
• Property insurance
• Umbrella insurance
• Accounting and bookkeeping fees
• Entity expenses
• Homeowner’s Association (HOA) fees
• Maintenance
• Capital Expenses (CapEx)
• Property management fees

Just like with the different sources of income, your property may not have every one of these expenses. As just one example, if you bought a property with 20% down (or more), you’re not likely to have Private Mortgage Insurance.

Next, why is cash flow important?

Cash flow from rental properties provides you with spendable money to live on and/or invest.

It is one of the two inputs for determining whether you’re reached your target monthly income in retirement. The Real Estate Financial Planner™ software uses the sum of your cash flow and the safe withdrawal rate times any cash you have in your  Accounts to determine if you’ve got enough income coming in to support yourself.

When the combination of your cash flow and your safe withdrawal rate times your account balances does not yet meet your Minimum Target Monthly Income in Retirement (MTMIR), we consider you to be in phase 1 of the Phases of Financial Independence™.

When the combination of your cash flow and your safe withdrawal rate times your account balances exceeds your Minimum Target Monthly Income in Retirement the software considers you having achieved a minimum level of financial independence. When you’ve met this minimum and you’re working toward your ideal, this is phase 2 of the Phases of Financial Independence™.

When the combination of your cash flow and your safe withdrawal rate times your account balances exceeds your Ideal Target Monthly Income in Retirement (ITMIR) then the software considers you having achieved your ideal level of financial independence. When you’ve met your ideal and you’re working toward generating twice your ideal each month, this is phase 3 of the Phases of Financial Independence™.

Once your cash flow and your safe withdrawal rate times your account balances exceeds two times your Ideal Target Monthly Income in Retirement the software considers you to be in phase 4 of the Phases of Financial Independence™. In phase 4, your cash flow and/or account balances could drop considerably and you’d still be able to comfortably support your ideal income requirements from your investments.

Cash Flow Helps You Qualify For Loans

Besides being used to determine if you’ve achieved financial independence, cash flow also helps you qualify for additional loans.

Many lenders will use a “modified cash flow calculation” to see if they believe a property provides positive cash flow and helps you qualify for additional loans or hurts you and makes it harder to get new loans.

Typically lenders will use 75% of gross rents minus your mortgage payment on the property. If that calculation is positive that property helps you qualify for your next loan. If it is negative, you need income from elsewhere (like your job) to carry that and support the new loan.

If you’re buying a rental property, many lenders will count 75% of the rents on the property you’re buying to help you qualify as well. So, you don’t need to support the full amount of the loan yourself without the help of the income you’re going to receive on that property too.

The Real Estate Financial Planner™ software does do a lot of these calculations for you as well.

For example, it will calculate your Debt-To-Income for you over the entire  Scenario. That way you can see if you’ll be able to qualify for the loans for your entire plan.

Here’s an example of a  Debt-To-Income chart for  Andrea from episode 1.

Plus, it will calculate the Minimum Gross Monthly Income Required to be below a 45% Debt-To-Income ratio over your entire  Scenario to show you how much you’d need to be earning from your job. It will even plot your Minimum Gross Monthly Income Required versus Gross Paychecks to show you how much you need to make and how much you are making. This allows you to plan your strategy with more confidence.

Here’s an example of that chart for  Andrea from episode 1.

And, a zoomed in version of the same  Chart adjusted for inflation.

See Your Numbers Enter your  Accounts,  Properties and strategy in the Real Estate Financial Planner™ to see this for your situation.

If you need help entering your info into Real Estate Financial Planner™ we do offer that support as an additional service.

How to Calculate Cash Flow on a Rental Property

How is cash flow calculated?

In the most basic sense, cash flow is your income from your rental properties minus your expenses.

For the Real Estate Financial Planner™ software, we typically define it as:

Here’s an example walkthrough of us calculating cash flow on a rental property.

Annual Cash Flow

Cash Flow is really just Net Operating Income minus all the financing costs for the property. That's because Net Operating Income already accounts for vacancy and the other Operating Expenses for the property.

For Typical 25% Down Payment Gainesville, Florida Rental Property we have a Net Operating Income of $26,888.40 per year or $2,240.70 per month.

The monthly payment for the mortgage on Typical 25% Down Payment Gainesville, Florida Rental Property is $1,270.32. If we multiply that by 12, we get mortgage payments of $15,243.84 per year.

And the Private Mortgage Insurance premiums for Typical 25% Down Payment Gainesville, Florida Rental Property are $0. The total for the year is $0.

So, if we take the Net Operating Income and subtract the mortgage payments and private mortgage insurance (PMI) we get an annual Cash Flow of $1,547.12.

That's $128.93 per month in Cash Flow.

Annual Cash Flow

What impacts cash flow? How do I improve cash flow?

In general, and I know this sounds ridiculously obvious but… if you can increase your income on a property, you will improve cash flow.

Similarly… if you can decrease your expenses on a property, you will also improve cash flow.

I’ve taught workshops on how to improve cash flow which includes a multi-page checklist for systematically going through all the ways to improve income on rental properties and all the ways to reduce expenses as well.

If you’re looking to improve cash flow, I’d recommend you consider going through that workshop and checklist with each of your properties.

How do I see the cash flow charts for the entire  Scenario?

Once you’ve entered your situation in the Real Estate Financial Planner™, you can easily see the  Total Cash Flow chart for all your rental properties.

First, click on the chart icon: .

Then select  Total Cash Flow from the list of  Charts.

For example, here’s a chart showing  Andrea total cash flow from Episode 1: Andrea Buys 8 Rentals with Down Payments for 2.

You can even click on the button to automatically adjust it for inflation so you can see the chart in today’s dollars.

Of course, once you enter your stuff, you’ll be able to see these  Charts (and a whole bunch more) for your own properties.

How do I compare cash flow from multiple  Scenarios?

Let’s say you want to see how cash flow changes if you do property management yourself? Or, what happens if you do cash out refinances on your properties? Or, sell some of your properties to pay off the remaining properties to improve your cash flow?

Comparing one  Scenario to another in the Real Estate Financial Planner™ software is super easy.

First, click on the chart icon: just like you would if you were viewing any  Chart for that  Scenario.

Then, add an additional  Scenario to the chart using the drop down menu below the  Chart.

Finally, select  Total Cash Flow from the list of  Charts.

Or, adjust for inflation while comparing them:

You’ll be able to easily see two (or more)  Scenarios compared on the same  Chart. Or, select a different  Chart to compare these same  Scenarios with any of the other  Charts as well.

Paying off properties early with extra cash flow?

This is just an example, but I did want to share it with you. In Ep 5: Andrea Pays Off Properties Early with Cash Flow we can see how cash flow changes for  Andrea if we does her baseline plan (episode 1) versus taking extra cash flow and using it to pay off  Properties early.

Here’s the  Total Cash Flow chart.

And here’s the inflation adjusted version (in today’s dollars):

How do I look at cash flow for individual  Properties in a  Scenario?

Sometimes you may want to see your cash flow for individual  Properties and not just the total (sum) of all the cash flow from all of your rental properties in a  Scenario.

Maybe you want to see which  Property cash flows the best or which is the worst?

That’s easy to do as well.

First, click on the chart icon: just like you would if you were viewing any  Chart for that  Scenario.

Then, click the “Owned Properties Charts” to see a list of the  Charts for all the  Properties in a  Scenario.

Finally, select  Cash Flow from the list of  Charts.

As an example, you can see  Andrea’s cash flow for all the  Properties in episode 1.

IMPORTANT NOTE: You’ll only be able to see the individual  Properties for ONE  Scenario at a time. You can’t compare individual  Properties for more than one  Scenario at the same time.

Where is cash flow on the deal analysis spreadsheet?

When analyzing buy-and-hold real estate deals one of the most important metrics to consider is cash flow. Download a copy of the spreadsheet to use when analyzing deals yourself and I’ve highlighted where cash flow shows up on it for you in the image above.

Return in Dollars Quadrant™

For the Return in Dollars Quadrant™ we use when analyzing deals, one of the four quadrants shows you the cash flow produced by that property.

For example, for  Andrea’s property in episode 1, here’s the Return in Dollars Quadrant™.

Cash flow also shows up in the Return in Dollars Quadrant™ report like this sample also from  Andrea episode 1 from month 120 below. The green sections of the stacked column charts represent the cash flow for that property for the year starting in month 120.

Same data except in table form.

And, finally, the same data except in a summarized quadrant form… all properties summed and on one quadrant:

Does the Cash Flow Power Meter™ measure cash flow?

Sort of. The Cash Flow Power Meter™ is a special version showing the current rent on a property with a background that shows you how powerful cash flow would be at various rents.

For example, in the following Cash Flow Power Meter™ the black line shows what the current rent is for the property, but the colored sections show:

• When cash flow on that property would be positive with professional property management (dark green)
• When cash flow would be positive self-managed (lighter green)
• When cash flow would be positive including Cash Flow from Depreciation™ (yellow)
• When you’d have negative flow with debt paydown on your loan (red), and finally…
• When you’d have negative flow with an interest-only loan (light gray)

The colors match the areas of return in the Return Quadrants™.

The black line shows how cash flow is for that property and how close you to the next level.

Or, we can see how cash flow performs over time with this version of the Cash Flow Power Meter™:

IMPORTANT NOTE: The black line is actually showing rent on a single property. You can view the Cash Flow Power Meter™ chart by looking at rent on a SINGLE property (make sure you are plotting one property and only one property) and then toggling on Cash Flow Power Meter™ to see the background colors.

Is there a special Cash Flow report?

Cash flow is really important. It provides you money you can live on or invest. It helps you reach your financial independence goals. It helps you qualify for future loans.

So, it shouldn’t surprise anyone that I have a special report that is all about cash flow for any  Scenario in the  Blueprint™.

You’ll be able to see this report for your own  Properties once you enter your info into the Real Estate Financial Planner™ but for now, check out  Andrea’s Cash Flow Report for Episode 1.