Cash flow is the flow of money through a business, in and out on a monthly basis. It is all the money, without regard to deductibility for tax purposes. Thus, a tax return may show losses, while actual cash flow might show profits, or vice versa.
Here is how cash flow works: Cash is coming in from rents collected on properties. Cash is going out of your business in the form of payments for expenses, like mortgage payments, taxes and other monthly expenses.
Think of ‘cash flow’ as a picture of your checking account. If more money is coming in than is going out, you are in a “positive cash flow” situation. If more cash is going out than coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdrafts. This is “negative cash flow.”
Evaluation of the property
Cash Flow = Net Operating Income (NOI) – Debt Service
or
Cash Flow = Rent income – Expenses – Payments
Cash Flow Example
We’ll assume for our example that you did your research and made a good buy on a property. Here are the purchase and rental particulars:
1. Purchase price of the property is $225,000.
2. Buyer places 20% down, or $45,000, financing $180,000.
3. 30 year loan is at 6.5%, with Principle/Interest payment of $ 1,138 per month.
4. Taxes and insurance at purchase are $2,400/year, for total mortgage payment of$1,338 per month.
From research you see a steady rental demand in the area and rentals stay occupied most of the time. However, to be prudent in these calculations, a 10% vacancy and non-payment risk will be calculated to anticipate real cash flow. The property rents for $2000 per month each. Let’s see how our calculation breaks down:
1. Gross rental income is $2200 X 12 months, or $26,400per year.
2. Payments are $1,338 X 12 = $16,056 per year.
3. Previous owner’s repair expense has averaged $1000 per year.
4. Vacancy and credit loss is estimated at 8% of rents or $2112 per year.
5. Owner spends about $200 each year in miscellaneous and advertising costs, and manages the property on their own.
Cash Flow Calculation
Those are the basic operational items that go into the cash flow calculation.
Cash Flow = Rent income – Expenses – Payments
= $26,400 – $3312- $16,056
= $7032
$7032/ 12 = $586 per month in positive cash flow.
Cash on Cash
Cash on Cash is a rate of return often used to analyze real estate transactions. The
calculation determines the cash income based on the cash invested.
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Analyzing the above return, from the Cash Flow Example, as “cash on cash
invested”, you would divide your actual cash investment of $45,000 down into the annual return of cash, or $7032. This is a yield of % on your cash invested!
$7032 /
$45,000
= 0.16 or 16%!
Get the Cash Flowing
If your want cash flowing into your mailbox and bank account, click below to learn how now, by sceduling a call with a Cash Flow Business Development Consultant:
