How to Calculate Net Cash Flow
In real estate investing, net cash flow is the difference between the total income generated by a property and the total expenses incurred in maintaining and operating it. Here are all the elements you need to consider for a comprehensive net cash flow calculation for Short Term Rentals:
Income:
The income from a Short Term Rental property includes the rental fees paid by guests, as well as other sources of income like cleaning fees, parking fees, laundry facilities, storage charges, or additional amenities fees.
Financing Costs:
If you have a mortgage on the property, your monthly payment will include principal and interest. Private mortgage insurance (PMI) may also apply if the down payment is less than 20% of the purchase price. These costs should be considered as part of your expenses.
Repair Costs:
Short Term Rental properties may require frequent maintenance to ensure guest satisfaction. These costs include minor repairs, upkeep, and refurbishments necessary between guest stays.
Ongoing Maintenance:
Regular services needed to keep the property in top condition for guests fall into this category. This can encompass anything from cleaning services to pool maintenance or landscaping.
Utilities:
All utility costs, including water, sewer, trash, gas, and electric bills, should be factored in. If these are not covered by guests, they represent an ongoing expense.
Taxes and Fees:
Annual property taxes and any applicable homeowners association (HOA) fees should be spread out over the year to provide a clearer monthly expense.
Insurance:
All insurance costs associated with Short Term Rentals, such as homeowners insurance, landlord insurance, and any additional hazard insurance required (like flood or earthquake insurance), should be accounted for.
Administration Costs:
Expenses related to property management, including property management fees, office supplies, software or apps used for bookings and management, and any mileage for property-related travel, should be included.
To calculate net cash flow for a Short Term Rental property, subtract the total of all these expenses from the total income. A positive result indicates the property is generating positive cash flow, while a negative result means the property is operating at a loss. This holistic view of cash flow aids in making informed decisions about real estate investments.
Cash flow isn't the sole determinant of a rental property's profitability. Investors should also consider factors like potential appreciation, tax benefits, tenant quality, and ease of management.
Cash-on-cash return is another valuable metric in Short Term Rental investing, calculated by dividing the property's annual pre-tax cash flow by the total cash invested, expressed as a percentage. While optimal cash-on-cash return varies based on individual goals and market conditions, many investors aim for a range of 8% to 12%.
Determining what constitutes good cash flow for a Short Term Rental property involves careful evaluation of these factors, aligning with an investor's broader real estate investment strategy and financial objectives.
