Property owners who are deciding whether to rent or sell their single-family home are rightly running the numbers. How much income might it generate? What other expenses will tap into profits? Ultimately, what kind of cash flow expectations should you have for a given property?
These are all essential questions to consider as you attempt to project future income and expenses on a property, and making these projections will help you decide whether it’s an investment you should hang on to. In this post, we share ways to help you determine the projected cash flow for your rental property.
Using a Pro Forma to Calculate Cash Flow
Predicting cash flow requires you to do some basic math. It’s just income minus expenses, but there are tools to help you make a more accurate prediction about cash flow and project that cash flow into future years.
Property owners who want to become landlords typically use a spreadsheet to create a document called a Pro Forma. There are numerous Pro Forma templates you can find online or you can create your own. The Pro Forma has slots for you to input assumptions about your property and the rental market.
In it, you will include things like how much you will charge for rent and what kind of expenses you anticipate incurring in year 1. You can then build columns for future years to further predict cash flow for subsequent years.
When building out your Pro Forma, it’s important to note that the assumptions you make in your spreadsheet will have a big impact on future years and how much you think you will get. It’s really an educated guess, but you can play with the numbers to see how certain assumptions will impact your cash flow.
To predict rental income, one of the best things you can do is look at comps. Put yourself in the shoes of a prospective tenant to see what similar properties are renting for. Type in a search on Zillow with the same criteria as your property, and you’ll get a good sense of the market and how much you can expect to charge for rent. That said, it’s important to remember that all those properties and numbers you’re seeing on Zillow are homes that didn’t rent. So, what you charge will likely be slightly below what you’re finding.
Expenses can be more unpredictable, but you may still have a good idea of certain recurring costs. For example, you may know what your insurance and property taxes are going to cost, and you can make some predictions about other maintenance, landscaping, and legal expenses.
Predicting cash flow can be challenging, but there are numerous resources out there to help you. We’re also here to help. Our team at RL Property Management manages more than 600 rental properties in Central Ohio, and we’re here to help you be successful with yours. To ask your questions, feel free to give us a call anytime at 614-725-3059.