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How to Calculate Positive Cash Flow on a Real Estate Investment

by Steve Lander

On its face, calculating a property's cashflow is relatively simple -- you just subtract your annual debt service from your net operating income. This formula isn't just useful as a tool to understand how your existing investments are performing, though. You can also use it to analyze potential investments to ensure that they will provide positive cash flow. Given an accurate net operating income and a loan quote that helps you estimate what your monthly payments will be, you can quickly find out if money will be left over to provide you with your desired cash flow.

Multiply the property's monthly rental rate by 12 to find your annual rental income. If the property isn't rented out, use a typical market rent that you are sure that you can achieve.

Subtract a vacancy factor from the rent to find your Effective Gross Income, usually referred to as an EGI. While one month's rent is a good approximation of the state of the rental market as of the end of 2012, your market may be different. If your real estate agent is an investment expert, she should be able to give you guidance on this.

Total up all of your property's operating expenses. These include property taxes, insurance, management and repairs and maintenance. Generally, if the expense is one that recurs, you should include it. Do not include your financing, though.

Subtract your operating expenses from your EGI to find your net operating income, or NOI.

Multiply your loan payment by 12 to find your annual debt service, or ADS. If you do not have an exact loan quote from your lender, but know the rates and terms, you can use a financial calculator, spreadsheet or online loan calculator to calculate the payment for your loan.

Subtract the ADS from the NOI to find your cash flow, which will be either positive or negative.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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