Cash Flow?

[Patrick E.]

I feel pretty stupid asking this but what exactly is cash flow?

Patrick

[J Scott]

Quick primer:

- Your income is the amount of money you take in each month. It probably comes from rent, but might also come from extra money you might from leasing parking spaces in front of the house/building, or from leasing a washer/dryer to your tenant, etc. The total amount you collect each month is your income.

- Then you'll have expenses. These include your property taxes, insurance, maintenance, utilities (if you pay them), property management (if you hire someone to do it), lawn care, HOA dues, etc. Many people also include vacancy in their expenses, meaning that if you expect your property to be vacant for let's say 1 month per year, your vacancy expense is 1/12 of your income (from above).

- When you have your income and your expenses all totaled up, you can determine your "Net Operating Income" (or NOI) with the following formula:

NOI = Income - Expenses

So, a house that rents for $700 per month, and where you get another $50 per month for use of the garage, has a total income of $750. If you then spend an average of $350 per month on all your expenses, your NOI is $400 per month (though generally NOI is expressed in yearly terms so your NOI would be $400 x 12 = $4800).

The general rule of thumb is that expenses will total between 40-60% of income, depending on a lot of factors. Many people like to use "the 50% rule" which means expenses are half of the income (if your income is $750/month, your average expenses will be about $375/month).

- Now, the one expense that wasn't included in "expenses" was your debt service (your mortgage payment). If you subtract this payment from your NOI, you get your "cash flow".

So, in the example above, where your NOI was $400, if you have a $48K loan at 7% amortized over 30 years, you're payment is about $320/month. So, your cash flow would be:

Cash Flow = NOI - Debt Service, or
Cash Flow = $400 - $320, or
Cash Flow = $80

So, after everything (except taxes), you take home $80/month from this property. That's your cash flow.

Many investors like to see $100/month in cash flow for each of their units...