How to Calculate Cash Flow

Learning how to Calculate whether a property cash flows or not is an essential skill every investor must possess. This one theory will either make or break you in the real estate investment game.

Cash Flow is derived by taking all of the money you receive and subtracting it from all the money you spend. What's left is your profit, or net income, or cash flow. As discussed on the Cash Flow section of this website, unless you want to lose money on a rental every month because you want some additional tax write offs, most investors want to see a positive cash flow on their properties.

I will show below how I calculate cash flow on properties I am considering making an offer on. Keep in mind that you must perform some Research for the area and know what the market rents are for the number of beds/baths and square footage of house you are considering (err on the low side), as well as what are the current vacancy rates for the type of property you are interested in. For homes, you will not normally be given any history of expenses, so you will have to use "guestimate" percentages to perform your calculation.

Income

-MINUS-

- Principal on the mortgage

- Interest on the mortgage

- Taxes

- Insurance

- Maintenance (use 5% of rents)

- Utilities (if you will be paying; in many areas tenants pay)

- Management (8-10% of rents depending on area)

- Vacancies (3-5% depending on area)

EQUALS = Cash Flow

This is called the P-I-T-I-M-U-M-V Formula, which can help you to remember everything you must include when calculating your true monthly cash flow.

For example:

$1,200 Rent

- 503.00 Principal & Interest

- 138.00 Taxes

- 35.00 Insurance

- 70.00 Maintenance

- 0.00 Utilities

- 96.00 Management

- 70.00 Vacancy

$288 Positive Monthly Cash Flow!!

Once you become familiar with the different rates and percentages in any area you are considering purchasing in, you will be able to calculate this figure very quickly. If the number meets with your satisfaction, then you know you will want to have your realtor go preview the property and report back to you. If it doesn't, then just say "NEXT" and don't waste their time or yours.