Passive income is the goal of every long-term investor, and that goal begins with cash flow. If you want to become a part of the property investing world and get on the right path to financial freedom, one of the most essential aspects is understanding your cash flow.
But what is cash flow?
Cash flow refers to the amount of money that is generated by a rental property after all the expenses have been paid. It is an important consideration when evaluating the profitability of an investment property. If your tenant can pay the rent which covers your mortgage, you’re already in a solid cash flow position.
So how do we figure out our cash flow? Well, the method is quite simple:
Cash Flow = Total Rental Income – Total Rental Property Expenses.
To calculate your cash flow for property investing, you need to subtract all the expenses associated with the property from the rental income. Expenses include mortgage payments, land or water rates, property management fees, insurance, maintenance costs and any other costs associated with the property.
Once you have calculated your cash flow, you can determine whether the property is a good investment. Positive cash flow means that the property is generating more income than expenses, which is generally considered a good investment. Negative cash flow means that the property is costing you more money than it is generating, which may not be a good investment unless you have a strategy to turn it around, such as future rent increases or an increase in value.
It is important to remember that cash flow is not the only factor to consider when investing in property. You should also consider the potential for an increase in value of the property over time, as well as the tax implications and any associated risks.
Ultimately, the amount of cash flow you need will depend on your specific financial situation, investment goals, and risk tolerance.
Keep an eye out for next weeks blog where we delve further into cash flow and what can reduce or affect it.