Just like in many other industries, cash is king in the real estate investing world. Cash flow management is what helps to ensure that you have the capital necessary to pay your bills and obligations while still growing your rental property business. How can you do a better job managing your cash flow and acquire new properties without worry?
Cash Flow 101
Cash flow is the difference between your rental property income and your rental property expenses, including debts like a mortgage. Cash flow management is a technique used for properties that are actively producing income for you. It would not include your primary residence under most circumstances, but it could include things like single-family rental homes, duplexes, commercial buildings and apartment complexes. Positive cash flow occurs when you are making more income than expenses. Negative cash flow occurs when the expenses and financing costs you incur are greater than the money you are bringing in.
While positive cash flow is obviously better, many landlords will experience months when a steep maintenance cost or vacancy could temporarily cause negative cash flow. However, the more positive cash flow that you have and the more time that you spend investing in learning cash flow management, the fewer the instances of negative cash flow will be.
How Can You Calculate Cash Flow?
- Determine the gross income from your rental property or properties. This is all of the income that you get before you subtract mortgage payments, financing costs or expenses. Expenses can include things like property insurance, property taxes, property management fees, utility costs, property maintenance, business licenses, marketing and more.
- Calculate all of the expenses related to the rental property and subtract them from the gross income.
- Subtract any financing fees that are being paid on the loans or property.
- Use the difference as your number for cash flow.
What Is Cash Flow Management?
Cash flow management is working with your expenses, tenants and rental properties to meet your profit goals. While some investors want to reach a return on investment of 8%, others want to see 15-20% or more. Think about your financial goals and work with MKS&H to evaluate avenues for growth. In some cases, cutting expenses can bridge the divide between what you are making and what you want to be making. In other cases, a variety of strategies like raising rent and investing in new properties can be the difference.
Experience the Benefits of Cash Flow Management with MKS&H
MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to explore the many tax benefits of investment properties and assess your real estate portfolio. Contact us today for a consultation.