REAL ESTATE

The concept of real estate cash flow may be unfamiliar to some, who only calculate the profitability of a property. However, this indicator is equally important as it determines the actual income generated by the investment. It is a powerful tool for measuring the financial performance of a property. Optimizing cash flow requires rigorous financial management to maximize profits and minimize risks. What is real estate cash flow? Why is it important to calculate it, and how can it be optimized?

Definition of real estate cash flow

When selecting a property, investors often make their decision based on the project's profitability. Calculating profitability is a straightforward process: estimated revenues, or rents received, are divided by the purchase price of the property. The higher the rate, the more profitable the property. However, it is important to note that the rate of return may not accurately reflect the actual profitability of the property.

Cash flow and rate of return are two different indicators. It takes into account revenues and expenses but not the potential appreciation of the property. Cash flow is the amount of money left over from your income after you've paid all investment-related expenses, including monthly payments, taxes, and management fees. Cash flow can be positive, negative, or zero.

When cash flow is positive, revenues exceed expenses. This is the ideal situation for any investor. Positive cash flow allows for additional income from your real estate investment. If your goal is to become an annuitant, you can use this cash flow to invest in other properties.

This is known as negative cash flow, which occurs when expenses exceed revenues. The investor must then make a monthly effort to save money to cover expenses. This situation is more common than one might think, which is why it is important to carefully study your project and ask the right questions before investing in real estate. Here's how: download your free real estate investment checklist..

When income equals expenditure, we refer to it as zero cash flow. In other words, you should not spend more than you earn on the property.

Why calculate real estate cash flow?

Reliance on concrete figures

Calculating cash flow allows you to determine the exact amount to expect. Negative or zero cash flow signals the need to make timely decisions to limit losses, which can occur due to regulatory changes. Failing to calculate cash flow puts you at risk of falling behind on tracking your income and expenses.

Realistic management planning

Cash flow estimation helps in managing expenses and anticipating cash inflows and outflows. It enables setting realistic financial targets and adjusting strategies accordingly, ensuring enough cash to cover all investment-related costs.

Calculating Real Estate Cash Flow

To calculate cash flow, you must determine your income and expenses for a specific period, whether it be monthly or annually.

Income includes rents received and any other generated by the property. Expenses include monthly payments, property taxes, insurance, management fees, maintenance and repair costs, utilities, condominium fees, marketing costs, and taxes. Include all expenses for an accurate result.

To obtain cash flow, subtract expenses from revenues using the following formula: Property cash flow = Income - Expenses. For example, if your property generates €800 in rent per month and expenses, including taxes, amount to €400 per month, your cash flow will be €400 per month.

Optimizing Real Estate Cash Flow Strategies

To increase your cash flow, you can use a strategy that aims to increase revenues, decrease expenses, or both.

Increasing rents To increase your rental income, consider offering services beyond what is currently available on the market. However, be sure to comply with local regulations and justify any rent increases by providing additional value to your tenants.

Search for supplementary sources of income. If your property allows it, you can add infrastructure such as a storage unit. Adding infrastructure can be an interesting option for renting in addition to the apartment. However, be sure to comply with local regulations.

Optimizing occupancy Reducing vacancy periods can increase your revenues. To attract the right tenants, offer impeccable service. Please click on this link for a guide on download your how to identify and avoid bad tenants.. One problematic tenant can jeopardize your entire real estate project.

Choosing a less conventional type of rental : for example, seasonal rentals or shared accommodation can increase the amount of rent received when the strategy is well thought out. These types of rental are more profitable than conventional ones, not only in terms of the rent received, which can be doubled, but also in terms of taxes.

Considering refinancing : if interest rates have decreased, refinancing can help you take advantage of the new rates and lower your monthly payments. You may also be able to renegotiate the terms of your loan with your bank.