How is the cash flow cashed out?

Question

I am new at this investing proses and I’m workin on my first rental property deal. But I’m still a little confused on the cash flow part. I know that the more cash flow the better and it’s based on the monthly income minus the monthly expenses. Do I get the cash flow in a check every month or where does that cash go? Does it grow every year due to the loan pay down or why does it increase every year?.

I hope I make sense. My objective is to save that cash flow to invest in other properties. Need help understanding the process a little more.

Thank you in advance.

I hope I make sense. My objective is to save that cash flow to invest in other properties. Need help understanding the process a little more.

Thank you in advance.

Nicole Heasley Beitenman · Answer

It kind of does. Once the loan is paid off, you no longer have a payment, so your cash flow goes up.

Nicholas L. · Answer

Hi @Juan Orozco got it.  I'd say that loan paydown usually creates equity.  If you're in a market where home prices are falling, equity creation will be slower than in a market where they are holding steady or rising.  So again, it just all depends on the market and the deal.

Juan Orozco · Answer

@Nicholas L. Thank you so much...that makes more sense to me now. What through me off is I saw a video where a property was being analyzed and the person mention the on the graph the loan pay down created equity and also cash flow increased so I thought that cash flow increased due to the loan pay down. ￼￼

Nicholas L. · Answer

Hi @Juan Orozco this is a great question.  I'd revise what you said a little - cash flow is actually your TOTAL income minus your TOTAL expenses.  Your rental income might come in every month - a check from your tenants - but your expenses might be "lumpy" in that you'll have a major repair once a year, a month of vacancy after tenants leave, etc.  The key is to make sure you're actually calculating your net income after ALL expenses, and not just PITI (principal interest taxes and insurance).  PITI dramatically understates the total cost of owning a rental property.

Depending on financing, expenses, vacancy and whether or not you're able to raise the rent, your cash flow might or might not increase each year.  It could decrease one year, and go up the next.  It all depends.  If you've financed a property, it likely will go up dramatically after the mortgage is paid off (for example, if you're on a 15 year mortgage, in year 15 + 1 month you no longer have principal and interest - but you absolutely still have TI and all other expenses to pay.)

There are lots of great threads on BP about how to segregate your rental income - for example, into different bank accounts - and also how to calculate your total cost of ownership.