Calculating Cash Flow + Cash on Cash Return
Put simply, cash flow on a rental property is the income generated from the rent, minus expenses and taxes associated with the property. If you did your numbers right, this should be a positive number. This is your cash flow.
Cash on cash return is calculated by multiplying your monthly cashflow by 12. Divide this number by your down payment dollar amount to get your cash on cash return percentage.
- 100k Property Value. Rents for 900/month. Expenses 600/month. 200 Monthly cash flow.
- 200 monthly cash flow x 12 months = $2400. Down payment on 100k Property = $20k.
- $2400 yearly cashflow / $20,000 down payment = 12% Cash on Cash Return
In general, a rehabber should not pay more than 70% of the after repair value (ARV) for a property, minus any repair costs or extra profit desired. Use the 70% calculator on BiggerPockets to determine an purchase price and to avoid paying too much for a property!
The 1% rule says that if your monthly rent is equal or greater than 1% of the property price plus any repairs, then you will be able to generate positive cash-flow on the property. This is a rule of thumb, and should only be used as a screening tool when analyzing properties. Download our Rental Property Calculator Here for in depth analysis!
A $125,000 property should generate $1,250 per month in rent
A house that requires $50,000 in renovations should have an after repair value of $125,000 and rent of $2,500.