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Cash Flow Calculation

Updated on August 20, 2010

Cash flow calculation for investing in rental property, this shows weather the investment makes economic sense, and weather it will turn you a profit in the long term, Acquiring such an investment can seem viable at the time but one needs to consider a few things before moving ahead. And this can only be done by thoroughly checking the status of it's cash flow or potential cash flow it may have in the future. Sticking to the basics as cash flow in and cash flow out and anything in between that may effect this. You will not know the in between part until you do good back ground research into the property itself.

In the case of rental property evaluating and calculating cash flow is just like anything you intend  investing in. There are legal requirements one must know about the investment as well as the financial growth of the property and expenditures. With rental property the financial and legalities will be slightly different compared to real estate as the main focus is in the potential of the property itself not the building. This includes things such as the location, any council laws that may need to be met, the condition and health of the property and any type of construction work the needs to be done either to improve the property itself or required by law.


Analyzing financial statements is a good way to predict any potential profits or loss in profits for a rental property this is also a good indicator of any future budgeting that may be needed. Cash flow simply gives an investor a look at the state of a properties financial health. if you are able to calculate the cash flow than you can determine weather or not it is a worth while investment.

Expenses

First, calculate taxable income or loss from the property, taxable income or loss is rent received minus three types of expenses: operating expenses, all equipment the is needed to run your business.

Depreciation, and mortgage interest expense, anything you think that may cause loss of value to the business and any mortgage payments that need to be paid.

 For example, depreciation on  a building is tax deductible over it's estimated useful life. If the property is rented, operating expenses such as rates, insurance and repairs can be deducted from rental income, as can interest on a loan used to purchase the property. If a rental loss is made, this can be deducted from other income earned, such as salary, interest, and dividends. Do not forget that owner's equity in the property increases each year as the mortgage loan is paid.

Property Value

Any increase in the property value during the years of ownership will increase the owner's ultimate return, this may be due to a change in the market or the improvement of the location or area which will increase the value of that property.

 Calculating the cash flow on a possible rental property investment will help decide weather the investment is worth any consideration. Investments with a negative cash flow are often best avoided because of the additional money they incur to cover operating costs and debt payments. But in some cases if a investor can see the potential in a property to get out of that financial crisis and has the potential for future growth then it may be viable but this takes extensive research to insure the investor of a profitable outcome.

  You will be wise to calculate the pros and con's before investing in rental property. You may be better off hiring a professional property evaluator to do this for you if you lack the knowledge.  

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