What is the Average Cash Flow on a Rental Property? (2024)

One concept that is absolutely essential for any aspiring landlords and real estate investors to grasp before they make their step into rental properties, is that they need to know what rental property cash flow is and how they calculate it. After all, cash flow is quite literally the lifeline of a rental real estate investment.

Luckily, while the phrase may seem daunting, it is easier to calculate the average cash flow on a rental property than you might think. In fact, for many investors, you are destined to either invest in real estate solely for the cash flow, or not invest at all. You may think that this statement is a little strong.

Though, while strong, it is not untrue. Cash flow is a very strong force when it comes to rental properties. So strong, in fact, that it is essentially the main form of profit made from rental income.

What Is Cash Flow?

Put simply, real estate cash flow is the difference between the rental expenses and rental income of an investment property. Now that you have the definition, calculating cash flow is actually extremely straightforward. The formula is:

Cash Flow = Total Rental Income – Total Rental Property Expenses

Essentially, cash flow will be the direct tell for a real estate investor as to if his/her rental property is profitable and just how much money is being made. A positive cash flow property is one that is able to generate more income than it does expenses. Negative cash flow, on the other hand, has far higher expenses than it does income.

This serves as a loss for real estate investors. When discussing what good cash flow is, this will depend on both the investment and the investor. Continue reading to find out about what the average cash flow is on a rental property.

Donald Shurts, a Keller Williams Advisors Realtor explains "The amount that an owner of a rental property enjoys as profit is generally known as cash flow. There are mainly two types of cash flow: gross cash flow and net cash flow. The gross cash flow indicates all the direct income from the rental properties like late fees, application fees, rent from the tenant, etc. Another type of cash flow is net cash flow. After deducting all the important bills like electricity bills, tax, and servicing, the rest amount is known as net cash."

What Is a Good Cash Flow on a Rental Property?

Knowing how to calculate cash flow, it is clear that positive cash flow is considered good cash flow. The higher the rental property cash flow is, the more profitable it is for the landlord or investor. However, the reality of cash flow is all about a variety of different factors in real estate.

To effectively know what it is, you must consider the following variables.

1. Location

You have likely heard it many times, but location is the most important thing in real estate. This becomes even more true when you’re tiring to find the highest possible cash flow for rental properties. The same can be said when it comes to rental property expenses such as association fees, property taxes, and interest rates.

In addition to this, there are many other factors when it comes to the exact location. As an example, the short-term rental legislation of an area can restrict Airbnb cash flow for many reasons. On top of this, if the area has rent control laws, the potential for rental income can be limited.

All of this combined will affect cash flow. Theresa Raymond, a real estate professional and broker, explains "An idea of the average cash flow can be extracted by seeing the rental tab of different neighborhoods or regions. For example, in Mesa, Arizona, the annual cash flow for rental owners stands up at about $2,880 and while Detroit in Michigan produces about $5,616. After this, the modification of the house and facilities compared to other houses add up to the cash flow. But a good cash flow is when the return on cash is at least 10% and more".

Related Reading: The Most Landlord Friendly States

2. Property Type and Price

Another thing to take into consideration is the property type and price. Different property types can have a far different potential for earning rental income based on how many units can operate at one sole time. Many multi-family rental properties, for example, have more rental units than a single-family property has.

As a result of this, properties that can accommodate bigger families will have a higher potential for cash flow than single-family properties. The price of the property will also play a big role here. More expensive properties will obviously fetch a higher cash flow most of the time.

On the other hand, cheaper properties will fetch a lower cash flow. Dustin Fox, Owner / Realtor of Fox Teams explains "Depending on the housing situation, area, and economic stability the average cash flow will differ in amount. A house built and rented for families to live in a suburban area will have lower average cash flow than a house rented in the city. In addition, renovation, vacancy, and other things can affect the average cash flow.

If a unit provides 100$-200$ monthly as a profit, that is considered good cash flow. However, the rate will increase with the type of housing.. If the house is a duplex or triplex, it is better to consider 400$ as the minimum cash flow.

The total invested amount is an essential aspect for consideration. For example, if someone invests 1M$ in property and generates 500$ monthly, undoubtedly it is not a good investment. On the other hand, if you have invested 10,000$ in a property and the monthly rent is 500$, this is a very good rent. As a result, the average cash flow will observe positive growth.

Following the 10% rule is another way to calculate the rate of average cash flow. Divide the yearly net cash flow by the amount of money that was invested in the property. If the result is over 10%. Then this is a sign of positive and a good amount of average cash flow".

3. Rental Strategy

Much like the type of property, the type of rental investment strategy you adhere to will influence what good cash flow on a rental property is. For example, an Airbnb rental strategy will usually yield far more cash flow than traditional rentals will.

What is the Average Cash Flow on a Rental Property

To truly answer this question, you would have to consider your location, strategy, property type, price, and so much more. For example, what amenities does your rental property have? How many bathrooms are there?

As you can see, there are many variables. On top of this, what one investor may see as good cash flow, another may be entirely unhappy with. One thing is for sure though, all investors will be aiming for a positive cash flow at all times.

While we cannot give you a definitive answer because every investor will have different financial goals. We can give you a rough answer. The average cash flow on a rental property for most investors is an 8% return on investment, or ROI.

Others will strive for an ROI of 15%. There really is no magic number or right amount to ear.

Related Reading: How Many Rental Properties To Retire

The Bottom Line

Generating income from the cash flow on your rental properties can be an excellent investment. In addition to this, you may be able to use the cash flow to pay down any mortgages while also generating equity. Keep in mind, when it comes to real estate cash flow, calculating your expenses and rental property income will be your number one key to success.

Anything around 7% or 8% is the average ROI. However, if you’d really like to succeed, you should always aim higher at around 15%. Anything between these percentages will be seen as favorable cash flow properties as long as you have a current tenant and are receiving the expected rental income without having to outlay massive fees and expenses.

Overall, it is important to always be aware of what your income and expenses are going to be as what you see here is only a rough guide to the average cash flow on a rental property. You can also use a free gross rental yield calculator by simply searching that term on google.

This way, you will easily be able to find out what the rental yield is.

This post is for informational purposes only and does not serve as legal, financial, or tax advice. Consult your own legal, financial, or tax advisor for matters mentioned here. Steadily is not liable for any actions taken based on this information. If you believe any of this information may be inaccurate please contact us.

What is the Average Cash Flow on a Rental Property? (2024)

FAQs

What is the Average Cash Flow on a Rental Property? ›

The typical cash flow for a rental property is usually around 7% to 8%. However, it can vary a lot depending on where your property is, how much it's worth, and other factors. Different investors have different ideas of what's good cash flow.

How much is good cash flow on rental property? ›

In general, a good average cash flow on a rental property is one that generates a positive net income after all expenses have been deducted. A common benchmark used by real estate investors is to aim for a cash flow of at least 10% of the property's purchase price per year.

What is a good cash return on a rental property? ›

A good cash-on-cash return for a short-term rental property is generally 10% or more, but a “good” return depends on many factors.

What is a good ROI on rental property? ›

In general, a good ROI on rental properties is between 5-10% which compares to the average investment return from stocks. However, there are plenty of factors that affect ROI. A higher ROI often also comes with higher risks, so it's important to compare the reward with the risks.

What is the average cash on cash return for rental property? ›

In general, most experts agree that between 8-12% is a good cash on cash return. This, however, is calculated based on an individual property. City level averages might not show a cash on cash return in this range, so it's important to do calculations for each specific income property that you consider buying.

How many rental properties to make 100k? ›

The amount of capital needed to generate $100,000 in annual income from rental properties depends on factors like cash flow, financing, and property types. For example, if you have an average cash flow of $1,000 per month per property, you would need approximately 8-10 properties to achieve $100,000 in annual income.

How much profit should a landlord make? ›

A good profit margin for rental property is typically greater than 10% but between 5 and 10% can be a good ROI on rental property to start with. What is the 2% cash flow rule? The 2% cash flow rule of thumb calculates the amount of rental income a property can expected to generate.

How long does it take to make a profit on a rental property? ›

Most of the time, you can get positive cash flow right from day one with your rental. Figuring out your profit for the year is a matter of taking how much rent comes in and subtract how much money goes out for expenses like taxes, insurance, and mortgage payments. What you're left with is your profit for the year.

How to tell if a rental will cash flow? ›

How do you know if a rental property has cash flow? The cash flow analysis should tell you whether your investment has cash flow. If you have money left over after calculating the gross revenue less all debt service payments and property expenses, then you have a cash-flow-positive real estate investment.

Is 5% return on rental property good? ›

While what constitutes a 'good' rate can vary depending on an individual's investment strategy, location, and market conditions, generally, a return between 6% and 8% is considered decent, while a return of 10% or more is viewed as excellent.

What is the 70% rule in real estate? ›

Put simply, the 70 percent rule states that you shouldn't buy a distressed property for more than 70 percent of the home's after-repair value (ARV) — in other words, how much the house will likely sell for once fixed — minus the cost of repairs.

What is the 1% rule for rental property? ›

The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.

What is the 2% rule for rental investments? ›

The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.

How is cash flow from rental properties taxed? ›

The rental income that you receive is taxable income, but you can reduce that income by the expenses of the property. For example, if you collect rental income of $12,000 but have expenses of $10,000, you will pay tax on the $2,000 profit.

What is a good cap rate for a rental property? ›

Generally, the higher the cap rate, the higher the risk and return. Market analysts say an ideal cap rate is between five and 10 percent; the exact number will depend on the property type and location.

How much cash should you have for rental property? ›

Set aside 10% of your profits each month to fund your reserve. Keep saving until you have 10 to 15 thousand dollars set aside. Three months' rent should be enough to cover your mortgage, taxes, and insurance in case of vacancies. This strategy is for someone comfortable with risk.

What is the rule for rental cash flow? ›

The 50% rule says a rental property's net cash flow should be 50% or more of the gross rent less the mortgage payment (P&I). Here is the formula you can use for that: Net cash flow = (gross rent x 50 %) - mortgage P&I.

How do you know if a rental is cash flow positive? ›

Cash flow is the NOI minus any debt service (like mortgage payments). Positive cash flow means the property is generating more income than it costs to operate and finance, indicating a potentially sound investment. To calculate cash flow, subtract your mortgage payment from the NOI to determine your cash flow.

Is the 1% rule realistic? ›

Is the 1% rule realistic? The 1% rule in real estate investing is a useful guideline but not always realistic in every market.

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