Knowing your net cash flow means accurately tracking income and expenses which is an essential part of being a landlord. For any company, tracking income and expenses is crucial. For real estate investors knowing how your business is performing financially will determine what you do next, whether or not you can refinance and reinvest equity, or whether you need to consolidate assets, raise rents or reduce overheads. This is where the net cash flow formula comes in.
What Is Net Cash?
Net cash serves as a gauge of a company's liquidity, indicating its ongoing ability to fulfill financial commitments, such as paying operational expenses and making debt payments.
To calculate net cash, begin by summing up all cash receipts (excluding credit transactions) during a specified period, commonly referred to as "gross cash." Subsequently, subtract the cash outflows allocated to obligations and liabilities from the gross cash total, resulting in the net cash figure.
When applied in the context of stock investing, net cash may sometimes allude to a condensed form of "net cash per share." Investors leverage net cash to assess the attractiveness of a company's stock, aiding in the determination of its investment potential.
In the realm of real estate, "net cash" often takes on a different connotation and may refer to the net cash flow generated by a real estate investment. Net cash flow in real estate is the surplus cash that remains after deducting all operating expenses and debt service from the rental income or revenue generated by a property.
What Is Net Cash Flow?
Net cash flow is a measurement of the money coming in and the cash going out of your rental business during a given period of time. Knowing your cash flow can help you better understand and manage day-to-day expenses like maintenance costs and professional fees or other operating expenses. It differs from profit, which is an overall indicator of financial health after expenses have been deducted.
While negative cash flow is not always a red flag (for example, it can be caused by delayed payments or high initial costs associated with expansion or capital improvements), most landlords focus on owning rental properties with positive cash flow.
If you have periods of repeated positive cash flow after expenses, it’s a good sign that you’ll be able to further scale your portfolio by reinvesting the money you have made back into it. On the other hand, negative cash flow will limit your ability to grow your portfolio to its full potential.
The net cash flow formula can be used on individual properties or your whole portfolio to give you a tailored insight into your income and expenses. It is most commonly measured on a monthly and annual basis but can be calculated at any time.
How To Find Net Cash Flow
The net cash flow formula
Net cash flow can be calculated by taking the total cash inflow of a business and subtracting the total cash outflow over a specific period of time.
Net cash flow = Total cash in – Total cash out
The total cash inflow includes rent as well as income like pet rent and laundry fees, whereas the total cash outflow includes expenses like maintenance and financing costs.
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Ways To Increase Cash Flow
Positive cash flow is the goal, but you may still encounter hidden costs from time to time that may hinder it. Many of these hidden costs are beyond your control and cannot be prepared for but there are some ways to maximize cash flow in the meantime:
- Increase rent (within reason)
- Renovate and upgrade to add value
- Use online rent collection to help prevent late payments
- Enforce late fees
- Charge monthly pet rent
- Reduce tenant turnover through comprehensive screening
Ensuring you have a healthy cash flow will provide you with a safety net, should you run into trouble in the future.
Related: 11 Ways Landlords Can Increase Cash Flow With Additional Revenue Streams
Limitations Of The Net Cash Flow Formula
As useful as the net cash flow formula can be, it is not all-encompassing. Some of the drawbacks are as follows:
- It does not tell the full story
- It does not take non-cash expense deductions into account such as depreciation
- It does not assess the profitability of the business
- It’s heavily dependent on the market you are in – one size does not fit all
The 1% Rule And What This Means For Net Cash Flow
The 1% rule states the monthly rent collected on a property should be equal to or greater than 1% of the purchase price. For example, if you were to buy a property for $100,000, you should charge at least $1000 in monthly rent to cover the cost of your investment. In this sense, the 1% rule is a calculation that can help you determine whether a potential investment is going to provide you with steady cash flow.
When assessing a potential investment, you can also use the net cash flow formula to decide whether the investment is worth it. To calculate this, you will need to know the expected income and expenses of the property.
Other Useful Formulas For Landlords
Net cash flow is just one formula that can be used by landlords to measure the financial health of their rental portfolios. Some other useful metrics that landlords should be familiar with are:
- Net Operating Income (NOI)
- Capitalization Rate (Cap Rate)
- Cash on Cash Return
- Gross Rent Multiplier (GRM)
- Occupancy Rates
- Rental Yield
- After Repair Value (ARV)
- Operating Expense Ratio (OER)
While none of these formulas give you a full picture when used alone, they can be used in conjunction with each other to shed light on how your rental properties or potential investments are performing. As well as formulas, calculators for landlords can also be used to determine cash flow, net yield, rental yield, and more.
Final Words
The net cash flow formula is one of many calculations that landlords should be using. As well as working to give you a clearer picture of your business’s daily financial health, the formula can also help you decide whether or not it is a viable time to expand your rental property portfolio.
Purpose-built property management software like Landlord Studio, allows you to track your income and expenses throughout the year, collect rent online, digitize receipts, and categorize expenses. In short, by digitizing and storing your records in Landlord Studio, you can easily access the data you need to calculate net cash flow at any given time.
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