real estate investor at her desk in front of a laptop crunching the numbers of a rental real estate investment

11 Jan 2024

Are you considering investing in rental property but unsure how to gauge its profitability? An accurate cash flow analysis is your roadmap to understanding the financial viability of a rental property. It’s not just about the rent you’ll receive—it’s about understanding the entire financial picture. Let’s dive into the key steps to conduct a comprehensive cash flow analysis, ensuring you make informed investment decisions.


Deep dive into cash flow analysis: The bedrock of smart rental investments

When eyeing a rental property as an investment, understanding the nuances of cash flow analysis is key. This isn’t just about skimming through numbers; it’s about comprehensively analyzing the financial health of the property. So, what exactly is cash flow analysis, and why is it crucial for rental property investors?


Defining cash flow analysis in rental property investment

Cash flow analysis is a financial tool used to assess the profitability of a rental property. It involves calculating the net amount of cash that the property will generate, taking into account all sources of income and all expenses. This analysis gives you a clear picture of whether the property will put money in your pocket each month or if it could potentially be a financial drain.


The components of cash flow analysis

Gross rental income

This is the starting point of your analysis. It’s the total potential income from the property, primarily from rent payments. It’s essential to research the local rental market to set realistic income expectations.


Operating expenses

These are the costs incurred to maintain and manage the property. They can include property management fees, maintenance costs, insurance, property taxes, and more. It’s essential to be thorough and realistic in estimating these costs by listing out all the expenses associated with the property:

  • Mortgage Payments: If you’re financing the property, include your monthly mortgage payment.
  • Property Taxes and Insurance: These are often overlooked but crucial costs.
  • Maintenance and Repairs: Set aside a percentage of the rental income for ongoing maintenance and potential repairs.
  • Property Management Fees: If you’re using a property management company, include their fees.
  • Vacancy Costs: Factor in the cost of the property being vacant between tenants.
  • Utilities: If utilities are not covered by the tenant, include these costs.


Considering capital expenditures

Capital expenditures (CapEx) are substantial costs that occur less frequently but are significant, like a new roof or HVAC system. They should be estimated and included in your analysis.


Net operating income (NOI)

This is the gross rental income minus operating expenses. NOI gives you a snapshot of the property’s potential profitability before financing costs are factored in.


Cash flow

The heart of the matter. Cash flow is the NOI minus any debt service (like mortgage payments). Positive cash flow means the property is generating more income than it costs to operate and finance, indicating a potentially sound investment.

To calculate cash flow, subtract your mortgage payment from the NOI to determine your cash flow. Positive cash flow indicates a profitable investment, while negative cash flow suggests the property might not be financially viable.


Assess cash on cash return

For a deeper understanding, calculate the cash on cash return. This measures the return on the actual cash invested. Divide the annual pre-tax cash flow by the total cash invested in the property.

Regular review and adjustment

Your cash flow analysis isn’t a one-time task. Regularly review and adjust your analysis to account for changes in expenses, rental income, and market conditions.

Why cash flow analysis matters

  • Risk Assessment: It helps you evaluate the risk versus reward of a property. A property with slim or negative cash flow margins might be riskier.
  • Investment Strategy Alignment: Depending on your investment goals, cash flow analysis helps you determine if a property aligns with your long-term financial objectives.
  • Financing Decisions: Understanding the cash flow can guide your decisions on financing the property, including loan types and terms.

Leveraging cash flow analysis for investment success

Successful real estate investment isn’t about guessing—it’s about making data-driven decisions. Cash flow analysis is a critical part of this process, providing you with a framework to evaluate the potential financial performance of a rental property. By mastering cash flow analysis, you can make informed decisions that align with your investment strategy and financial goals.

Jasmine’s journey: A real-world example of rental property cash flow analysis

Jasmine, a proactive real estate investor in Colorado, has embraced the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy to scale her rental portfolio in Denver. As a hands-on landlord, Jasmine manages her own rental properties, eliminating property management costs. Let’s evaluate her cash flow analysis post-rehab and refinancing.

The property and BRRRR financials

  • Initial Purchase Price: $250,000
  • Rehab Costs: $50,000
  • After-Repair Value (ARV): $350,000
  • Refinance with DSCR Rental Loan: 75% of ARV = $262,500
  • Interest Rate: 7.750%
  • Loan Term: 30 years

Step 1: Estimating rental income post-rehab

Given the improvements, Jasmine can competitively price the rent:

  • Monthly Rent: $3,200
  • Annual Gross Rental Income: $3,200 x 12 = $38,400

Step 2: Calculating operating expenses

  • Maintenance and Repairs: 0.8% of ARV annually = $2,800
  • Property Taxes: Approximately $3,000 annually
  • Insurance: Around $1,300 annually
  • Vacancy Rate: Estimated at 5% of annual rent = $1,920
  • Total Annual Operating Expenses (without management fees): $8,020

Step 3: Net Operating Income (NOI)

  • NOI: $38,400 – $8,020 = $30,380

Step 4: Refinancing and mortgage payments

  • Monthly Mortgage Payment: Approximately $1,870.
  • Annual Mortgage Payments: $1,870 x 12 = $22,440

Step 5: Determining cash flow

  • Annual Cash Flow: $30,380 (NOI) – $22,440 (Mortgage Payments) = $7,940
  • Monthly Cash Flow: $7,940 / 12 ≈ $662

Step 6: Assessing cash on cash return

  • Total Cash Invested: $37,500
  • Annual Pre-Tax Cash Flow: $7,940
  • Cash on Cash Return: ($7,940 / $37,500) x 100 ≈ 21.17%

The result

Jasmine sees a significant cash flow and return on investment (ROI) for her BRRRR. The monthly cash flow is approximately $662, and the cash-on-cash return is an impressive 21.17%. Her hands-on approach, combined with the strategic use of a DSCR Rental Loan, significantly boosts the profitability of her investment.

Jasmine’s strategic use of the BRRRR method, followed by refinancing with a Kiavi DSCR Rental Loan, demonstrates the power of combining savvy real estate techniques with flexible financing. When executed thoughtfully, this approach can lead to significantly higher returns, showcasing the potential for substantial profitability in real estate investments.


Final thoughts

Conducting a thorough rental property cash flow analysis is crucial for any real estate investor. It helps you understand the potential returns and risks associated with a property. By following these steps, you can ensure you’re making an informed decision that’s backed by solid financial understanding.

Thinking of investing in rental property but need some guidance? Prime’s resources can help you navigate your investment journey with confidence. Explore our tools and insights to enhance your real estate investment strategies.

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