Determining how much cash flow you can expect from a rental property investment is critical to evaluating if it makes financial sense. The amount of cash flow generated depends on several key factors including property type, number of units, rent prices, occupancy rates, operating expenses and leverage selected. By analyzing these factors thoughtfully, investors can create reasonable cash flow projections and determine if potential rental income meets or exceeds financial goals.
Property type refers to whether a property will be rented as single family homes, townhomes, condos, apartment buildings or mobile homes. Generally speaking, multi-unit properties like apartments or small apartment buildings will generate higher total cash flow than single unit properties due to economies of scale. More units mean more potential rent revenue and lower per-unit operating costs. However, multi-unit properties also typically require more capital to purchase and manage. Evaluating options based on your risk tolerance and financial resources is important.
The number of units, especially for multi-unit properties, greatly impacts cash flow potential. All else being equal, a 20-unit apartment building will typically produce double the cash flow of a 10-unit building, and triple that of a 5-unit building. Determining an ideal number of units for your situation depends on obtaining an attractive purchase price, finding well-located properties, and having enough cash on hand and financing available to get the deal done. There is no “perfect” number of units, so evaluate based on your unique priorities and constraints.
Rental rates charged also significantly affect cash flow. Research comparable properties in the local market to determine realistic rental rates that can attract quality tenants while still allowing enough cash flow to meet investment goals. Higher achievable rental rates, even with the same expenses, will result in greater cash flow. However, rental rates also impact risks, so they should be set conservatively enough to fill available units with ease.
Occupancy rates refer to the percentage of units that are rented and producing revenue at any given point in time. Cash flow will increase as occupancy increases, ideally reaching 95-100% to indicate a waitlist. Lower occupancy rates mean vacant units losing money, so maintaining as high an occupancy as reasonably possible is important. This often requires continually marketing and responding quickly to showings and applications, providing competitive pricing and high quality units, and retaining quality long-term tenants.
Operating expenses include costs like maintenance, repairs, property taxes, insurance, property management fees, utilities, trash, landscaping and any homeowner association dues. These costs reduce the revenue from rental rates, impacting overall cash flow. Lower expenses mean a greater percentage of revenue remains as profit. Careful budgeting and economical choices can help keep essential expenses at a minimum. However, costs must remain reasonable to properly maintain the property and provide services expected by tenants, impacting risks to the investment.
Using leverage, or financing a portion of the purchase to obtain interest deductions and tax benefits, also impacts cash flow. More leverage means lower required down payment, but higher interest costs reducing cash flow. Less leverage avoids interest costs altogether but requires a larger down payment, both reducing cash flow initially and impacting personal financial reserves. Determining an optimal leverage amount depends on interest rates, costs vs. tax benefits, down payment available, risk tolerance and more.
In summary, to determine how much cash flow you can expect from a rental property investment, analyze the potential rent revenue based on property type, number of units, rental rates and occupancy, estimate essential operating expenses required to properly maintain the property, and evaluate different leverage options to determine your cash flow under various scenarios. By running the numbers thoroughly, evaluating risks and rewards objectively, and balancing financial goals with personal risk tolerance, you’ll be able to make sound investment decisions with confidence in potential cash flow. With hard work and prudent planning, rental property income can absolutely meet or exceed expectations.