Georgia Real Estate Investors
What is Cash Flow
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In a practical sense, cash flow on an investment property refers to whatever money is left over monthly after all of the bills are paid for the property. There are exceptions, but, as a general rule, if you cannot bring in enough money to pay all of the monthly expenses to maintain a rental property, it won’t be a good investment. To determine if you will be able to have a positive cash flow you need to know your fixed costs, that is, those costs that will be the same every month. Unless you have an adjustable rate mortgage, your mortgage payment will be the same every month. If you have mortgage insurance, that will be a fixed cost as well. Your taxes, depending on whether they are placed in escrow or you pay them annually are also fixed. So, now you know some things that are unchangeable:
- Mortgage Payment
- Mortgage Insurance
- Taxes
Your tenants, more than likely, will pay all of their own utility bills so these will not need to be factored in unless you have arranged to pay some of these bills as well. Maintenance is unpredictable so you should factor in a little bit of extra wiggle room for repair and maintenance and unforeseen expenses. My experience indicates that 10% more than your three fixed costs should be added to your monthly fixed expenses so that you are prepared for the unexpected.
Now that you know how much it will cost you (this does not include your time) you will need to determine market rent. Market rent is determined through a rental market analysis. This is discussed in another article. Often, tenants will try to negotiate their rental payment with you and this is why you need to know exactly how much your monthly outflow of money will be. If you are paying out $900 every month for all of your fixed expenses and including your 10% extra, you need to make at least $900 month in rental income to break even. If you are advertising the payment at $1,000 and your potential tenant offers to pay you $950 a month, you know that you will still have a positive cash flow and even your 10% added on top for repair and maintenance issues. Now all that work has yielded you a grand total of $50 a month in what we call positive cash flow.
About the Author
Ryan Ward of Keller Williams Realty Consultants is a member of the national, state and local REALTOR associations, and resident of Alpharetta, Georgia who specializes in listing and selling real estate in Atlanta. For more information about Ryan Ward and Atlanta homes,visit his Atlanta Real Estate website or call 404-630-3187.
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