Calculate the Cashflow for Real Estate Investments

Rainsby
Nov 13, 2020
Jan 28, 2022
Here you can explore why and when it is interesting to look more closely at the cashflow of your real estate investment. Feel free to use our calculator to check the cashflow of your investment.
* Required fields
Rental Income
Basic Rent
The basic rent is the rent paid for the usage of the property and is defined in the rental agreement. The basic rent does neither include operating expenses nor maintenance costs. Alternative names for the basic rent are net rent, base rent or net rental income.
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Costs
non-transferable Operating Costs
The non-transferable operating expenses can be found in the annual statement. The non-transferable expenses are paid by the landlord or landlady and are stated in the German regulation on operating costs (§1 BetrKV). Costs for the administration of the property are for instance part of the non-transferable operating costs. You may find similar regulations in your jurisdiction.
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Maintenance Fee
The maintenance fee is only taken into account in the calculation of the return, if you provide a value for it. It provides a more realistic view on the net return and is relevant for the cashflow. The value for the maintenance fee may be found in the documents of the annual statement of the property provided by the property management.
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Financing Costs
If you decided to finance your property, you will have to pay an annuity to the bank which consists of the redemption rate and the interest payments. You may find the amount of the financing costs in your bank statements or in a document that the bank has provided.
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one time Costs
Repair Costs
In this field you may provide the repair costs for your real estate property that fall into the time frame you want to calculate the cashflow in. If for instance you want to calculate the cashflow for the year 2020, then only provide repair costs for this year and not the year before or after.
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Individual Tax
Here you may provide your individual taxes, that you have to pay for your income from rent lease.
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Result per Month
Cashflow per Month
This is the cash flow per month based on the input data you provided. It is calculated by subtracting the monthly operating costs and the average one-time expenses from the monthly base rent.
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Total running Costs per Month
The operating costs per month consist of the non transferable operating expenses per month, the maintenance fee per month as well as the financing costs per month.
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Total one time Costs per Month
The one-time expenses per month consist of repair costs as well as individual taxes. If you provide these numbers on an annual basis, we calculate the monthly average.
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Result per Year
Cashflow per Year
This is the cash flow per year based on the input data you provided. It is calculated by subtracting the annual operating costs and the one-time expenses from the annual base rent.
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Total running Costs per Year
The operating costs per year consist of the non transferable operating expenses per year, the maintenance fee per year as well as the financing costs per year.
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Total one time Costs per Year
The one-time expenses per year consist of repair costs as well as individual taxes. If you provide these numbers on a monthly basis, we calculate the annual sum.
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1. Which Input Parameters are required to calculate the Cash Flow?

You need the profit and expenditure from your investment property to calculate the corresponding cash flow. These are:
  • base rent (your profit),
  • the ongoing operating expenses of your property:
  • optionally the one-off expenses of your property:
    • maintenance and repair expenses,
    • as well as your individual taxes.
In our cash flow calculator you may chose your indiviual time unit (month, year or even half-year and quarter) for each input parameter separately. This way, you just pop in your values as they are available to you. Our calculator always represents the results in the units 'per month' and 'per year'.

2. What is the meaning of Cash Flow?

The cash flow provides an insight, where and how much cash is being transferred in or out of your property investment. In layman terms, a positive cash flow gets the investor richer since here the earnings exceed the expenses. Vice versa, having a negative cashflow the investor has to sink more cash into his investment since the expenses exceed the earnings.

3. How do I use the Cash Flow to build Wealth?

Usually, you intent to make an investment to accumulate your residual income, and increase your net wealth. Property investments basically provide you with two options to build wealth:
  • with a positive cash flow
  • and/or the property value appreciation.
A positive cash flow (earnings > expenses) in a property investment means that you have a regular residual income from the moment you buy and rent your property. Immediately, your cash position in your bank account increases. Therefore, instead of having to speculate into the future, you calculate the earnings of your property in the present.
You might even profit from compound interest by reinvesting your positive cash flow into further properties or assets. In any case, a positive cash flow is always a reasonable residual income stream to build wealth.
On the other hand, property value appreciation is always a speculation into the future and the appreciation might or might not happen. If your property value increases, however, you initially gain paper profits (the difference between purchase price and market price), since no cash has flown into your pocket. Only if you sell your property with profit, you convert the paper profit to earnings and cash flows into your pocket. However, if the value of your property drops below your overall investment expenses and you sell, then cash flows out of your pocket.
In principle, property value appreciation concerns every property investor. However, it is not uncommon that a real estate property is a lifetime investment, which is passed on to the next generation.

4. Why is the Cash Flow important?

To know the cash flow means to have more control over your investments. A positive cash flow enables you to built residual income and therefore wealth, while a negative cash flow tells you to reconsider your investment and part with it in case. A positive cash flow can be considered as interest on the investment and -as such- can be used to leverage the compound interest by reinvesting it into further properties or other assets.
In what way a negative cash flow might be applicable to build wealth under certain conditions and careful planning is mentioned in question 6 about the cash flow.

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5. How do you calculate the Cash Flow?

The cash flow of a property investment is calculated by subtracting all operational and one-time expenses from the basic rent (earnings):
basic rent
- operational expenses
- one-time expenses
cash flow
To calculate the monthly cash flow, you plug-in the basic rent per month as well as the operational expenses per month and all one-time expenses that occurred in that specific month. You may use an average of one-time expenses as well instead, by dividing the one-time expenses accumulated over the whole year by 12. This way, expenses like repair costs are distributed over the year and the cash flow does not fluctuate too much on a monthly basis. The yearly cash flow is obtained by applying the basic rent and operational expenses per year, and all one-time expenses accumulated over the year.
The operational expenses contain the none-allocatable operating costs, the maintenance fee as well as redemption and interest of your financing. The one-time expenses are usually repair costs and individual taxes:
basic rent
- none-allocatable operating costs
- redemption and interest of your financing
- repair costs
- individual taxes
cash flow
Strictly speaking, the allocatable/transferable operating expenses should flow into the calculation of the cash flow. However, in Germany, transferable operating costs can be allocated to the tenant, provided a corresponding clause with legal capacity is present in the rent agreement. Our cash flow calculator and search considers therefore only values, which directly affect the net wealth of the investor.
In the light of microeconomics, paper losses such as write-offs are never considered in the cash flow calculations. Only the actual losses or profits are taken into account.

6. Does a Property Investment with negative Cash Flow make Sense?

Under certain conditions and carefully executed calculations and planning, a negative cash flow might be considered feasible. For instance, some property investors assess the redemption payment of their financing in such a way, that they obtain a negative cash flow. The argument made there is that a negative cash flow leads to losses and the losses can be deducted from taxes. If however your property investment has a negative cash flow even without redemption payment taken into account, the property price of your investment has to rise at least as much as your operating losses. This strategy is considered risky since you try to balance real operating losses with paper profits and only if you sell your property with enough profits your accumulated operating losses might cancel out.
At this point it is important to know the tax laws not only in your jurisdiction but also in the tax jurisdiction of your property's location. For instance in Germany -- you may find similar laws in other countries -- the tax law distinguishes between vertical (different type of income) and horizontal (same type of income) tax-deductible loss compensation. Operating losses from rent and lease can be compensated both vertical and horizontal as long as the tax authorities recognize an intent to make profits on the property investment. If such an intent is denied by the tax authorities, the vertical as well as the horizontal tax benefits vaporize not only in the current year, but also retrospective and in the future.
Now, if your property as a negative cash flow as a result of high non-allocatable operating expenses, exceeding the basic rent, you often are stuck with old rental agreements with no regular rent increases. In such a case it is hardly possible to raise the rent sufficiently in a short time frame, since you have constraints from rental control and stabilization, which furthermore differ between federal state.
In principle, you should always reconsider the economic viability of your property investment having a negative cash flow even after a proper due diligence. In any case, why not just chose a property investment with a positive cash flow, which increases from the start on your residual income and helps you to build wealth and get independent.

7. What's the Difference between Cash Flow and Profit?

The term cash flow originates from economics and is applicable to property investments as well. The cash flow is the real net amount of cash (cash-equivalents) being transferred into or out of the property investment. The difference to the economic profit is that paper losses are not included in the calculation of the cash flow.

8. How do I find Property Investments with a positive Cash Flow?

With Investby.Immo, you are free to pop in your desired monthly cash flow in the search form of our real estate search engine. You will be given a list of all properties from our database, having at least the cash flow you specified.
However, be advised that we explicitly exclude indiviual costs like repair and financing expenses for now, since these depend on your personal settings. More precisely, we calculate the cash flow from the basic rent minus the non-transferable operating expenses and minus the maintenance fee. For your individual cash flow, you further have to consider your financing expenses, repair costs and taxes.
This calculator and this article are neither financial, legal nor tax advice. The information displayed here were researched in all conscience, but are without warranty.
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