If you want to become an investor, you’re probably wondering: How much can I expect to earn in cash flow for rental properties?
That’s what you’re going to learn today.
If you want to…
- Earn more money
- Quit your job
- Build financial security
…then you’re going to like this article. Let’s get started.
You’ll learn…
How to calculate cash flow on a rental property
First, what is cash flow?
Basically, it’s the record of your property’s expenses and income: How much you’re spending and how much you’re getting as a return.
So, here are some common operating expenses to plan for as a rental property investor:
- Maintenance/repairs
- Insurance
- Property taxes
- Leasing fees
- Vacancies
- CapEx (capital expense) funding
- Advertising
- Investment-related travel
- Payroll (for any employees)
Some of these expenses are fixed, like insurance costs. And others are variable, like maintenance and the money you lose when you have vacancies.
Because yes, vacancies happen when you invest in rental properties. But if your rate is between 2-7%, that’s normal.
Ultimately, a lot of the above expenses are tax-deductible, though, which helps (and I’ll talk about this more in a minute).
Now, to calculate your cash flow, here’s the basic process:
First, start with your net operating income, which is your real estate revenue minus your operating expenses (think property taxes, repairs, and so on)
Then, subtract your mortgage costs and any money you spent on property improvements.
Add any loan proceeds for property improvements. For example, if you replaced your roof and took out a loan to pay for it, note this as an addition.
Finally, add any property interest. Make sure to include all the income you get from your property to get an accurate cash flow calculation.
The final result is your cash flow before taxes (CFBT). To make this easy, you can use a cash flow calculator like this one.
Let’s look at a specific example to see how this works.
Imagine you buy an investment property for $200,000, and you pay 20% upfront.
If you get a typical 30-year loan at a 5% interest rate and collect $2,000/month in rent (assuming a 5% vacancy rate), your monthly positive cash flow will be approximately $482.
As an investor, knowing your cash flow is incredibly important because it’s one way to find out if you’re making a profit from your investments or not.
What is the average cash flow on a rental property?
On average, you can expect your cash flow to be about 8%. With that said, that’s just the average, and how much you make will depend on a lot of factors (like location and market demand).
What I do is buy large properties in college towns, maximize the number of bedrooms, and rent to college students.
Thanks to this rent-by-the-room strategy, I end up with significantly higher cash flow than if I rented the same property to one person.
Quick example: If a couple decides to rent out the same room in one of my rentals, I charge on a per-person basis, which helps me earn even more.
So, for one of my properties, I ended up charging $940 for the room (versus the usual $670 for one occupant).
And since I also rented the rest of the property, my cash flow was over $2,700 per month – 73% more than the Rentometer estimate.
What is a good cash flow on a rental property?
The short answer is… It depends. Good cash flow is subjective. What one person considers good won’t be enough to someone else.
With that said, here are a few factors that can help you determine if you’re getting the most out of your investment:
Positive cash flow: Make sure your revenue is higher than your operating expenses. Otherwise, your rental property will be a liability rather than an asset.
Long-term appreciation: Is your property located in a high-demand area? That’s a good sign for long-term returns.
Market conditions: What’s the current market like in your area? What about the rates for similar rental options? Using housing sites like Zillow, you can search for rentals in a particular neighborhood and see what your competition charges in rent. That can give you a better idea of how profitable your rental is in comparison.
And speaking of profitability, there’s a rule called the 50% rule you should know about. Basically, the idea is that your operating expenses should be 50% of your gross income.
So, random example: If your rental brings in $24,000 in gross annual income, expect to spend about $12,000 for expenses like insurance, maintenance, and so on – before factoring in your mortgage.
Okay, now that we’ve talked about cash flow, how can you maximize it? You’re about to find out.
How to improve your cash flow
Here are a few effective strategies.
Ask for more rent
In some cases, improving your positive cash flow can be as simple as increasing your rent to keep up with your property’s market value.
Not sure how much you could rent your property for? There are tools you can use to look up rent prices based on your zip code.
Upgrade your property
Unsurprisingly, property upgrades can increase your property’s value so you can charge more.
A few specific examples that can give you a high ROI include:
Finish your basement
According to research, finishing your basement can result in a 70% ROI.
And that makes sense: Flipping a basement instantly adds extra square footage where your tenants can hang out, which is especially valuable if the rest of the rental is small.
You can also add valuable amenities, like a washer and dryer, a pingpong table, and so on.
Repaint walls
A fresh coat of paint can make a space more inviting for a minimal upfront investment. Just make sure to stick with neutral colors: One, it’ll make your space feel bigger and brighter.
And two, neutral colors match with all kinds of decor by definition, so you won’t have to keep repainting your walls to accommodate tenant preferences.
Focus on curb appeal
The best renters value living in a home that looks good from the outside. So, to attract those kinds of tenants, keep the outside of your rental in good condition.
Things like regular lawn care and tasteful landscaping can go a long way here.
A few other things that can dramatically increase your property’s curb appeal: An updated garage door, a steel front door, or even small touches like a new mailbox and house numbers.
Minimize vacancy
No tenants means no positive cash flow. So how can you minimize vacancies? First, know what kinds of tenants you want to attract, and offer the kind of rental they’re looking for.
Example: To attract high-income earners who would be willing to pay a higher rent for a nice place, think about amenities they’d want that you can provide, like off-street parking.
By filtering out tenants who are likely to default on their rent and need to be evicted, you can save yourself a lot of trouble down the road.
And once you have dream tenants, an effective way to retain them is to offer a great rental experience. So, stay on top of things like regular maintenance, and take their feedback into account.
Another thing you can do is have tenants sign a 12-month lease before moving in.
That way, you’ll know that your property will be rented for at least a year at a time – without you having to scramble to find tenants every few months.
To maximize your returns, renting during the summer when demand is highest is also a smart move.
Add extra income streams
Rent isn’t the only way to make money from your properties.
For example, consider offering parking as an optional add-on. Depending on your property’s location and your tenants’ needs, adding designated parking to your rental can instantly make it more valuable.
Another way to boost your earnings?
Offer storage space. The self-storage market is worth over $44 billion, with no sign of slowing down. A lot of people have stuff they can’t fit in their homes, so if you have room, it’s something to think about.
Rent by the room
As I know first-hand, the rent-by-the-room model is an efficient way to maximize your positive cash flow.
And if you decide to go this route, you can start small: Even converting an office into an extra bedroom and renting to two people instead of one can increase your returns.
Self-manage
If you want to avoid having a property manager (but don’t want to work 24/7 either), good news: You can. I follow a system I call “tenant empowerment”.
Here’s how it works: My tenants know that if common issues come up, like spotty internet or plumbing leaks, they can call the service providers directly – and skip having to call me first.
Result: Problems get resolved quicker, and I don’t have to be involved.
Renegotiate your costs
As an investor, always keep track of where your money is going, and see how you can cut back on your spending.
For example, when you’re on the market for an investment property, don’t settle for something just because it’s cheap.
Here’s why: Cheap properties can end up costing a lot in unexpected repairs. I learned this the hard way after shelling out $30,000 to fix a sewage leak and animal infestations.
So, my advice is, steer clear of old houses, and always have a property inspected before making a purchasing decision.
What are some other ways to save?
Here are a few:
- Get good rental property insurance. That way, if your investment property gets damaged, you won’t have to pay the full amount out of pocket.
- Refinance your mortgage. Shopping around for a better rate can save you a lot of money in the long run. For example, if you can afford higher mortgage payments, consider getting a shorter loan to reduce interest costs.
- Do preventative repairs. Regularly inspect your plumbing, electrical, and HVAC systems, and check for things like leaks, mildew, and animal infestations.
- Check appreciation potential. Investing in a thriving area with great schools and employment opportunities will make your property easier to rent and limit vacancies.
- Choose the right contractors/vendors. If you need a contractor or vendor to help you renovate or manage your rental, pick someone who has valid licensing and insurance, not just good reviews.
Do you pay taxes on cash flow from your rental property?
In a word? Yes. As a real estate investor, you’d file a 1040 Schedule E with the IRS. Basically, this is the specific form to use for declaring supplemental income that’s not generated from working a typical job.
Here’s the good news: There are plenty of expenses that you can deduct from your taxes to reduce how much you owe.
For example:
- Ads and marketing
- Repairs/maintenance
- Mortgage interest
- Insurance
- Property-related travel
- HOA fees
- Property depreciation
- Phone bills
- Tenant screening reports
- Materials and supplies
- Property management fees
This is not a complete list, but it should give you an idea of what kinds of expenses you can deduct.
The key to getting as many tax deductions as possible? Keep careful records of your expenses.
For example, if you get your siding replaced and want to claim a tax break, keep receipts, contracts, and any other records that prove how much you paid and what repairs you had done.
Depending on your rental income and tax-deductible expenses, you might not owe property taxes at all.
Next steps
So, there you have it!
Now you know all about cash flow for rental properties and how to calculate it. As you can see, there are a lot of ways to increase your positive cash flow and keep more money in your pocket when tax season rolls around.
As an investor with a seven-figure portfolio myself, I help people just like you go from having no investment knowledge at all to becoming savvy investors who have a lot more financial freedom.
Want that kind of life too? Don’t know where to start?
You can book a call with me right here.
Read more:
How to Buy Rental Property as a Complete Beginner
