How to Calculate Cash Flow From Rental Property

by HomeLoan.com

Managing a rental property can be difficult especially when you begin to take into account all the expenses in comparison to your monthly rent. There are many aspects to the flow of cash to and from the rental home and if you want to make a profit you must take this into account when choosing a rental amount.

Step 1

Compare rental home to apartment building. With an apartment building the mortgage on the building is more expensive than a single family home, but you also have more than one tenant living there. You can add all the rents together when determining what your monthly influx of rental cash will be instead on only one or two rents from a rental home or duplex.

Step 2

Examine your monthly mortgage payment. Your mortgage payment on the home should be paid entirely by the rent every month and is your main source of cash outflow. This is the base amount for your monthly rent and you build upon it. This is why rent is more expensive than a mortgage payment because rent also takes into account other expenses.

Step 3

Include at least part of your yearly taxes in the rent. Each year your property is assessed with a tax by the state and county to pay for schools and other items. The bulk of the property tax should also be included in the rent as well, but if the rent begins to seem inflated you can lessen the amount from taxes. Also, take into account any tax deductions afforded to you.

Step 4

Plan for contingencies. You should expect at least $500 a year in rental repairs. You may not use that much, but over the years it will grow and can be used for larger repairs (e.g., a new roof). Also, if the time comes to seek a lawyer for a tenant eviction you will be prepared.

Step 5

Expect a loss for a few years. With so many expenses causing negative cash flow and the rental amount staying stagnant you should be able to calculate the average flow of cash to and from the home. Do not expect to make much of a profit on rental units until the mortgage is paid off or until you are able to refinance the loan. Each year you have tenants paying rent, the more equity you build in your home which can be used for refinancing, a home equity loan or a line of credit.