24. Avoid These Mistakes: How to Calculate Cash Flow the Right Way

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Ready to stop guessing your rental income and start understanding the real numbers? Violeta spills the truth about why most investors get their cash flow wrong — and how you can fix it with just a few simple steps. Whether you're a beginner or seasoned pro, this episode will transform your approach to real estate investing.

In this video:
- Critical mistake investors make 
- How to accurately account for expenses like taxes, vacancies, maintenance, and CapEx
- A step-by-step example of calculating cash flow 
-The free tool that simplifies complex calculations for up to six properties
-Why overestimating cash flow can lead to financial disaster
- Common pitfalls: ignoring vacancy, miscalculating taxes, skipping property management costs
- How to build a resilient emergency fund for unexpected repairs

Chapters
00:00 Understanding Cash Flow in Real Estate
06:45 Common Mistakes in Cash Flow Calculation
10:38 Calculating Cash Flow Accurately
16:36 Utilizing Tools for Cash Flow Analysis

Transcript

SPEAKER_00 0:00

Most rental properties that new investors buy don't actually cash flow. And it's not because the deal was terrible or the market, you know, went crazy. It's because the math that they use was wrong. They calculated the cash flow incorrectly because someone told them as long as the rent is higher than the mortgage, you're going to make money. They walk into these deals thinking that they are going to build passive income. What happens when that water heater quits? When your property taxes go up, when you have to repair a roof. And that's where a lot of real estate investors go wrong because they do not account for that when they are calculating their cash flow. So today we are going to fix that. I am going to show you exactly how to calculate cash flow for a rental property step by step with a real example. And I'm going to cover all the expenses that you need to include and think about when you are out there analyzing a property that you may want to invest in. First, let's talk about what cash flow is. Cash flow is the money left over each month after you collect the rent and pay all of the expenses for the property. And it sounds very simple. This is where a lot of people mess up. This is where it starts getting messy. And you will even see wholesalers advertising properties where they say, Hey, I got this property for X amount of dollars, and you are going to get $800 in cash flow. And a new real estate investor or an investor that doesn't know how to calculate cash flow correctly is gonna see that and be like, oh wow, this is a great deal. $800 in cash flow, freaking awesome. Let me go for it. But then when you actually look at the numbers and look at how they came up with that $800, they made the mistake of just having the rent, the potential rental income minus the mortgage. And then that's it. And again, that is not the whole story, and this gets a lot of investors in trouble. Now, before I get into what goes into calculating cash flow, let's talk about some of the common mistakes that investors make when they are calculating cash flow or analyzing a property that they want to potentially buy. Number one, already mentioned, is just subtracting the mortgage. It's very common. I did it when I turned my first house into a rental, and then I went and bought a second property. Like I didn't analyze for cash flow at all. I just was like, oh, you know, I could rent it for more and I'll be making money. Like, yay. And that costs me. Number two is the property taxes. You want to account for properties going up. So a lot of times they will have a tax bill that is lower from when they purchased it because it was assessed at a certain price. But now when it turns over, when you purchase, you know, you're obviously buying it more than likely at a higher price. So then the property taxes are going to go up. So a lot of times new investors calculate the taxes, the property taxes, based on the current, the ones that the previous owner is paying. But you could always go and look at the county website and see what percentages they charge for property taxes, and then you could make a better educated assessment. Mistake number three is assuming zero vacancy, especially if you take a property over with um a tenant already in place that has been there for some time. You're like, oh wow, they I already have a tenant, I don't have to worry about the vacancy. At some point, they might just leave, decide they want to move somewhere else or whatever. So you always want to account for vacancies because turnover is going to happen, leases and people relocate, and you're going to have some turnover costs. Mistake number four is a lot of times investors they update their houses that they take over, and then they're like, Well, now this property that I bought is updated, so I don't have to really account for maintenance or repairs. But let me tell you, no matter what, plumbing is always something that is going to mess up, whether it gets clogged or whatever, or maybe they have a kid and they throw something in there and they clogs. And just because it's updated doesn't mean it's maintenance-free. You want to upkeep the maintenance and do preventative maintenance so that way it doesn't become a bigger headache in the future. Mistake number five. Uh, a lot of times investors want to save some money and get the extra uh money that they would have paid a property manager, and so they do not account for paying a property manager because, like, I'm going to manage this property myself. And so then they just don't calculate that. And then maybe later on down the line, they decide that you know what, I don't want to manage this property, it is way too much. I don't want the tenant calling me all the time. I want to be able to go on vacation and not worry about a tenant trying to reach me or anything like that. And then they realize that they never accounted for hiring a property manager. So then they are stuck managing that property. The next mistake is that a lot of investors confuse repairs with CapEx. Now it's kind of similar, right? Because you're talking about repairing something, but when you are accounting for the repairs and maintenance, these are smaller things like you know, a little unclogging a toilet, or with CapEx, you are accounting for like things like the HVAC, the roof, things that are going to require like a lump sum. And this is where a lot of investors get stressed out because they don't account for this, they don't save for it. And so that's when you'll hear about investors that they get frustrated because all of a sudden they have to replace a roof. The next mistake, which we'll get into a little bit more once I go into the calculation part, is using low percentages to make the deal work. You're like, well, if I, you know, cut back on this and that, whatever, and manage it myself, then this is going to work. I'm going to cash flow. Don't do that. That just sets you up for failure. Things are going to go wrong. Every single rental property is going to have something to where, if you didn't account for it and use, you know, conservative numbers, then it's going to cost you. What is all included when you are analyzing a potential property? First, you're going to account for vacancy. This is going to be based off a percentage. You're going to break down your expenses on a monthly basis. Most of these are going to be percentages minus, you know, the mortgage and the property taxes and the insurance. For example, you want to include vacancy. Do this as a percentage of the potential rental income. And you could kind of research, you could call your property manager or just a property manager in general in that area, and they and you could ask, like, hey, you know, what's the typical vacancy rate? And there's some averages that you could find based on the city and state. Next, you also want to account for the repairs and maintenance. Again, this is going to be a percentage. If you have a more updated one, then you could afford to do kind of like a lesser percentage. If you have an older property like mine, I try to do like 8%. Next, you want to account for property management. Again, even if you are planning to manage it yourself, account for a property manager. And usually it's between 8 to 10%. Just go with the 10%. Do the higher one because you just don't know what which property manage what they're going to charge in your area, unless you already know, if you already shopped around, then use that percentage included in your monthly cash flow calculation. So that way that if you do decide that, hey, I just don't, I'm tired of managing the property thing, you could go ahead and turn it over and you are still cash flowing. Next is of course CapEx, which of course is also going to be a percentage of the monthly rental income. And even though you might not have, like, let's say a water heater break right away, or you have a new roof, at some point, you know, in the time that you have that rental property, especially if you're planning to have it long term, you want to still put that percentage, and this goes with vacancy, the repairs and maintenance and all that. Put that into preferably a high-yield savings account and have it as a savings so that way when it does pop up that you need to replace a water heater, then you have those funds in there. And this is what protects you. And this is how you start building up the emergency fund that you need for every single rental property. So that way you are safe and you are still protected and you are still making money. So let's use this example of let's say you bought a rental property or you're looking at a rental property and you see that you can get $2,000 per month in rent. So first subtract that mortgage, then you're just gonna work yourself down all these categories. Most investors use the base of 5% of the rent, and then you're gonna do the same thing with the repairs and maintenance. Then I subtract the property management. I do 8%, they charge me 8%. And then for CapEx, again, most investors use 5%. So basically, you can see repairs and maintenance. You'll see the common 5% being used. So now what does that look like overall? Again, we started off with $2,000 in gross rent. Calculating everything, you have $290 per month in cash flow for the year, you would get $3,480 for the year. And that is a big difference because if you had made the mistake of just subtracting the mortgage, $2,000 minus the $1,250 of our mortgage, then you would think that you would be making $750 when realistically you are making more like $290 a month. You could see the big difference and how it can get a lot of investors in trouble, especially if it ends up that after you actually do the actual calculation, you end up in the negative cash flow. And that is a mistake that I made early on when I bought my second property. I didn't do any of that. So then when it came to put it on the market, on the rental market, I actually was negative cash flow of $200. Now it sounds like a lot of math and a lot of numbers, but I do have a free calculator that you can download. I'll link it below to help you run the numbers. And with this calculator, you could do up to six properties, which is awesome because then you, as you're shopping around, you're going to go look at different properties and you could quickly compare and see which one is the better deal, and then go ahead and put an offer. So that is how you calculate cash flow accurately to make sure that you protect yourself from all the extra expenses that come with owning rental properties. You don't have to be a genius at math. Other than that, let me know what questions you may have in regards to cash flow or in investing in rental properties in general. Drop them down in the comment section if you're watching on YouTube, if you're listening to the podcast, hit me up on Instagram, DM me any questions that you may have, and I will answer them in a future video. Other than that, until next time, bye.