How to Get Cash Flow from Real Estate

Investing in rental real estate has the potential to provide many benefits, including tax write-offs, portfolio diversification, and passive income. 

Tax breaks aside, cash flow is one of the most important reasons for investors to allocate capital to investment real estate. Properties have positive cash flow when the rental or lease payments exceed the asset’s all-in operating expenses. The greater the spread between cash flow and operating expenses, the greater your return. Negative cash flow, meanwhile, occurs when a property’s operating expenses exceed the income generated from lease payments. 

There are multiple ways investors can generate cash flow from rental properties. Let’s dive in. 

How to Calculate Cash Flow from Your Rental Property 

In a perfect world, you’d buy an investment property and its rental payments would exceed your monthly financial obligations for the asset. Getting there requires some insight, though.  

In order to ensure a rental property generates positive cash flow, you have to calculate the following: 

• Gross income generated from lease payments and any other income 
• Net operating expenses 
• Any outstanding debt or liens on the property 

Rental payments are likely to be your main source of income from your rental property, especially for a single-family home. Commercial properties may offer additional sources of revenue, such as paid parking or fees from renting signage space to nearby businesses, if applicable. 

Expenses can include a host of line items, such as:  

• Mortgage payments 
• Insurance and property taxes 
• Maintenance and repairs 
• Utilities 
• Third-party property management fees 
• Marketing and fees for professional services 

Vacancy can also be included in expenses, since you won’t be receiving any income on a dark property. Balancing expenses versus gross income leaves you with net operating income, or NOI. A positive number means you’ll likely generate positive cash flows from your rental property. Don’t forget the important tax breaks that can help out with a rental property’s financials as well – insurance, taxes, professional fees, maintenance, and many other expenses are tax-deductible. Depreciation is another important tax advantage for income-generating properties. 

While experienced and novice investors alike should always pore over an investment asset’s financials and conduct a full cash flow analysis prior to buying, there’s also some quick math you can do to get a baseline idea of whether an asset will generate positive cash flows. It’s called the 1 percent rule, and here’s how it works: When you buy an investment property, you’re likely to be in the black if you can charge 1 percent of the asset’s purchase price in rental payments. Using that logic, if you purchase a single-family home for $250,000, you’d have positive cash flows if you can charge $2,500 in rent. Of course, you have to ensure market demand and property location justifies your desired rental payment. 

There are many ways experienced real estate investors can leverage their expertise to increase a rental property’s cash flows. Let’s take a look. 

Boosting Cash Flows From Rental Properties 

Rising home prices mean you’re likely to realize significant asset appreciation on your investment property, especially if you have a longer-term investment horizon of five years or a decade or more. There are a few things you can consider doing along the way to increase cash flow from your rental property: 

• Value-added upgrades. There’s a reason why property renovation shows make for popular television. Replacing outdated appliances and fixtures, upgrading flooring, kitchens, and bathrooms can cost a significant amount of capital upfront, but you are likely to recoup your money through higher rental payments, especially if you have a longer-term investment horizon. 

• Energy-efficient upgrades. Today’s appliances are far more energy efficient than what hit the market just 10 years ago. Upgrading really old air conditioners, water heaters, and furnaces will likely lead to significantly lower utility expenses. You may even qualify for tax deductions to offset the cost of a new heat pump or furnace. 
• Landscaping and exterior renovations. Increasing the curb or renter appeal of a single-family rental property through renewed front and back landscaping can ensure you don’t have a dark property with no tenants. Similarly, replacing water-damaged wood siding, outdated roofing, or installing energy-efficient double-pane windows can help you charge more rent while lowering your utility costs. 

Each of these upgrades requires you to make a significant capital investment in your rental property. You’ll have to carefully weigh the worth of these upgrades versus your projected increases in lease payments.  

Putting it All Together 

Cash flow matters in investment real estate. Perhaps the best way to ensure positive cash flow is to buy low. Every dollar you can save on the purchase price of your investment property can positively impact the asset’s cash flow. 

Shopping for the best mortgage rate can also help reduce operating expenses. A lower interest rate means a lower monthly debt obligation for the property. Upping rental payments, especially for new tenants, can lead to a direct spike in cash flows. Reducing operating costs, especially for ongoing maintenance and repairs, will lower your direct expenses. Lastly, being a good and attentive landlord can reduce tenant turnover, which can be the single-largest killer of positive cash flow on a rental property.