What is Cash Flow?§
Cash flow represents the net amount of money left over after a rental property owner meets all financial obligations related to the property. It can be a crucial indicator of the property’s health and profitability. Calculating cash flow involves subtracting loan payments, taxes, and operating expenses from the income generated through the rental agreement.
Practical Example§
Consider you own multiple rental properties. The positive cash flow these properties generate can be leveraged for various purposes. For instance, you might use it to undertake essential repairs and renovations, thereby enhancing the value of all your properties. Additionally, reinvesting your cash flow by acquiring new rental properties is a strategy frequently employed by savvy investors to expand their real estate portfolios, thereby amplifying their overall cash flow.
Calculating Property Yield§
One effective way to evaluate the efficiency of a property is by calculating its yield percentage. This ratio is found by dividing the annual cash flow generated by the property by the total amount invested. For example, an investment of $100,000 that yields $10,000 annually results in a 10% yield.
Adhering to these principles of cash flow and yield assessment can provide robust insights to invest wisely and sustainably in real estate.
Related Terms: cash flow analysis, net operating income, return on investment, capital expenditures, passive income.
