Cash Flow

• Cash flow is the rental income left over after paying debt, insurance, taxes, repairs, capital expenditures, vacancy, etc.
• While some areas may have rent control, other areas have less regulation. Given the need for housing, there is some pricing power, allowing you to increase rent over time, at least in line with inflation (and therefore not losing purchasing power with your cash flow). Given how many rentals there typically are in an area, or options for living, there is not a large amount of pricing power. You cannot increase rent considerably more than the market, otherwise no one will live there.
• Also, given the mortgage payment is fixed, as rent increases, you have a widening effect with increasing cash flow. This is important, since while you may not cash flow much in year one, as rent increases, you can cash flow more in the future.
  • Ex: If year one rent is $1000, and expenses are $900, then year one cash flow is $100. If you increase rent by $30, and expenses stay level, then year two rent is $1030, expenses $900, and cash flow is $130. A 3% increase in rent led to a 30% increase in cash flow. This is known as operating leverage.
  • This is why it is important not to just look at cash flow year 1.
  • This is also why it is important to continually increase rent every year. (See the property management course for more detail).