All About Rental Income Property Cash Flow
The most common reason real estate investors are investing in rental income property is to acquire the cash flow the investment produces in order to make a tidy profit and a high rate of return.
Oh, there are some cases when the investor might want negative cash flows for tax purpose benefits, but this is generally an exception and not the rule for the typical real estate investor that you and I may encounter.
In our world, real estate investors are always expecting the income property's bottom-line to be positive so they can pocket enough money to supplement their income and perhaps set aside for future family expenses. For most of our investors, cold hard cash is king.
In the following article, we'll go over how cash flows come from a rental income property so those of you new to real estate investing have at least an elementary understanding of what it is.
We'll start with a definition:
Cash flow is the rental property's revenue inflows less all its outflows. It's the money that remains after all the rents are collected and all the day-to-day expenses associated with owning the property are compensated.
It's generally regarded in the following manner:
- Ongoing - Cash flows received by the investor throughout his or her holding period (e.g., income from rented apartment units or leased office space, coin-operated washers and dryers, storage facilities and so on).
- One-Time - Cash flows (or sales proceeds) received as a result of a sale of the investment property.
It may be daily, weekly, monthly, or annual cash flows, and may also result in a sum that's negative or positive. That is, there may be some money remaining for the investor to collect and pocket, or there may be a deficient which the owner most cover out-of-pocket.
Finally, there are two sources of income available to the investor:
- Cash flow before taxes (CFBT) - Money collected but susceptible to the real estate investor's annual Federal income taxes.
- Cash flow after taxes (CFAT) - Money the investor can really pocket once the income taxes are paid and the IRS satisfied.
In other words, for both ongoing and one-time collections, the owner will receive an amount during the course of a year that must be ear-marked for taxes, and then in the following year (after the taxes are paid) the remainder the owner gets to keep.
Okay, now before we conclude, let me pass on a few other things about rental property cash flows you should always consider before making your final investment decision.
- Always be realistic with all the income and expense numbers throughout your evaluation.
- It's always safer to anticipate a little or negative income you are able to handle with enough cash on hand rather than expecting to cover it by the property.
- Avoid cake-in-the-sky rents, overly-optimistic vacancy rates, and always include all the necessary operating expenses when you conduct your rental property analysis.
Here's to your real estate investing success.