Updated: Feb 10
Here’s Everything you need to know about Cash flow in real estate investing explained for dummies
I went to google... and I found this for the definition of cashflow.
cash flow noun
Definition of cash flow
: a measure of an organization's liquidity that usually consists of net income after taxes plus noncash charges against income
Yeah, that pretty much doesn't make sense. So lets break it down.
What is Cash flow?
Cashflow in real estate = how much you take home from rental after expenses.
Theres a simple formula to calculate cash flow: Cashflow = income - expenses
Ok, but how do you get income and expenses?
Well your income is broken down to things like: rent, washer and dryer, parking, and atm income. These are ways you can make money from the property.
Your expenses are things like: mortgage and interest, taxes, insurance, vacancy, repairs and utilities, property management. Basically anything that costs you money to have the property.
Why do you need to know cash flow?
It is used to determine if a property you are going to buy is a good investment or not.
Heres the standard:
If positive = could be a good deal
If negative: bad deal
You have a duplex. It rents for 2400. The mortgage, taxes and insurance costs 1200 a month. Water and sewer utility costs you 50 bucks a month. You decide to save 100 bucks for vacancy and 250 dollars for repairs. If you plug those numbers in the formula you get a positive cashflow of 800 dollars a month. Thats pretty sweet!
In this example, we got a triplex. Its renting for 2600 a month total. The washer and dryer costs you 60 bucks a month. The mortgage, taxes and insurance costs 1800 a month. You are putting 300 aside for vacancy (the area has a higher vacancy rate) and 400 bucks for repairs (the home needs more for work. If you plug it all in, you get a negative cashflow of 100 bucks a month. Thats ass. We don't want that.
How do you use this in a sentence?
For the first example with the duplex you could say: “This place is pretty good, it cashflows me 800 a month.” Yeah.... it can be used as a verb...
In example two with the triplex, you would say: "The property has a negative cashflow of 100 a month."
If something cash flows is it definitely a good deal? Not always. The way you can really determine that is by using cash on cash return. If I missed anything please ask away with questions in the comments below!