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 look at how cash flows are generated by a rental income property so those of you new to real estate investing have at least an elementary understanding of what it is starting with a definition:
"Cash flow is the rental property's revenue inflows less all its outflows. In other words, 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."
Cash flows are generally regarded in the following manner:
- Ongoing - This is the ongoing stream of income collected by the real estate investor throughout his or her holding period. Namely, the income generated from rented apartment units or leased office space, coin-operated washers and dryers, storage facilities and so on.
- One-Time - This is the one-time cashflow — or sales proceeds — real estate investors collect as a result of selling the investment property.
Cashflow is not categorically limited to any particular time frame. They may be daily, weekly, monthly, quarterly, semi-annually or annually. They may also result in a sum that's positive or negative. That is, there may be instances (positive) when some money remains for the investor to collect and pocket, and there may also be instances (negative) when outflows are greater than inflows and result in 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.