Thinking about making money from a rental property? It’s important to know if your property is really giving you profits! Let’s figure out your rental property’s cash flow together. Cash flow is just the money you get after paying all the costs of your property. Our easy guide will walk you through five simple steps to calculate your rental property cash flow. By the end, you’ll know exactly how much money you’re making each month. Whether you’re new to renting out properties or you’ve been doing it for a while, this guide will help make the numbers simple and clear. Let’s get started and make sure your investment is paying off!
Step 1: Calculate Your Total Income
When you’re figuring out how much money your rental property is bringing in, start by looking at all the different ways you earn from it. This isn’t just about the monthly rent your tenants pay. There are likely other smaller amounts that add up to your total income.
First, write down how much rent you get every month. For instance, if you rent out your flat for $30,000 a month, that’s your starting point. But don’t stop there. Do you have extra facilities that you charge for? Maybe you offer a parking spot for $2,000 a month or provide a washing machine for $500. Every little bit adds to your income.
Also, remember to include any seasonal fees like maintenance charges or yearly facilities use that are paid to you. All these should be counted in your monthly earnings to get a complete picture.
Let’s sum it up. If you get $30,000 from rent, $2,000 from parking, and $500 from other facilities, your total monthly income from the rental property would be $32,500.
Knowing this total income is the first step to managing your property’s finances effectively. It helps you see the big picture and ensure you’re charging enough to cover costs and make a profit. Keep everything noted down and easy to check, so you always know what’s coming in.
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Step 2: Add Up All Your Expenses
After you know how much money your rental property is making, it’s time to look at what it costs you. Understanding your expenses is just as important as knowing your income because it shows you how much you really get to keep at the end of the day.
Start by listing all the regular costs. These could include your monthly mortgage payment, which might be a big chunk of your expenses. Then add the property tax you pay every year divided by 12 to find the monthly cost. Don’t forget insurance payments and any money you spend on repairs and maintenance, which keep your property in good shape and your tenants happy.
Here’s an example to help you understand: Suppose your mortgage is $20,000 per month, property taxes are $1,200, insurance costs you $800, and you spend about $2,000 on maintenance. That adds up to $24,000 each month going towards keeping your property running.
Other costs might include utility bills (if you pay them instead of your tenant), management fees (if you hire someone to manage the property), and maybe even homeowner association fees if your property is part of a complex.
Adding up all these expenses gives you a clear picture of what it takes to maintain your property. Knowing this is crucial because it helps you see whether your rental is really earning you money or if the costs are too high. This step is all about making sure your investment is working for you.
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Step 3: Calculate Net Operating Income (NOI)
Now that you’ve figured out how much money you’re making and spending on your rental property, it’s time to calculate your Net Operating Income (NOI). This is a simple but crucial step because it tells you how much money your property is actually earning before dealing with any loan payments.
To find your NOI, take the total income you earn from the property and subtract the total expenses. This includes everything from rent to parking fees and from mortgage payments to maintenance costs.
For example, imagine you earn $32,500 a month from renting your property, parking fees, and other services. Each month, you also spend $24,000 on mortgage, taxes, insurance, and upkeep. Here’s how you’d work it out: NOI = Total Income – Total Expenses NOI = $32,500 – $24,000 = $8,500
This $8,500 is what you really earn from the property every month before any loans. It’s important because it gives you a clear picture of whether your property is doing well. A positive NOI means your property is earning more than it costs to maintain, which is exactly what you want. If it’s negative, it might be time to look at how you can reduce your expenses or increase your income.
Understanding your NOI helps you manage your property better and make informed decisions about future investments or improvements. This number is essential for any property owner who wants to ensure their investment is profitable.
Step 4: Consider Loan Payments
Once you know your rental property’s Net Operating Income (NOI), the next step is to look at your loan payments. This is crucial for understanding the actual cash flow, which is the money you truly earn after all expenses, including loan repayments.
If you have a loan or mortgage on your property, the monthly payment will directly impact your earnings. To calculate your real cash flow, just subtract the monthly loan payment from the NOI.
For example, let’s say your NOI is $8,500 each month. If your loan payment is $6,000 per month, here’s how you would figure out your cash flow: Cash Flow = NOI – Loan Payment Cash Flow = $8,500 – $6,000 = $2,500
This $2,500 is what you actually have left after all costs, including the loan. It’s the real profit you make from your rental property each month. Knowing this number is vital because it tells you if your investment is worth it after considering the debt you’re paying off.
It’s a good idea to keep an eye on this number over time. If your cash flow is low or negative, you might need to find ways to reduce your loan costs or increase your income. This could mean refinancing your loan for better terms or increasing rent slightly if the market allows. Managing this effectively ensures your investment remains profitable in the long run.
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Step 5: Plan for Future Expenses
Once you know your actual cash flow, it’s smart to think ahead about future costs. Your property might need repairs, or you could face unexpected bills. Planning for these expenses now helps you avoid surprises and keep your cash flow steady.
Set aside a part of your monthly earnings for a reserve fund. This is like a savings account just for your property. How much should you save? A good rule is to keep at least 10% of your monthly rent. If you earn $30,000 from rent, try to save $3,000 every month for future costs.
This fund can cover things like fixing a leaky roof, painting the house, or replacing an old water heater. These repairs can be expensive, but if you have money saved up, they won’t hurt your wallet or your property’s profit as much.
By planning for these expenses, you make sure that your rental stays in good shape and keeps making money. It also means you’re ready for anything that comes up, keeping you calm and in control as a property owner.
Ready to elevate your property’s potential? Explore our tailored real estate services at Patty Bender Advisors and start maximizing your investment today!