Rich Dad Education – Real Estate Blog

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Principles of Investing: CASH FLOW

Rich Dad Education Real Estate

One of the vital components of successful real estate investing is understanding how cash flow is calculated and what cash on cash return means. These concepts are critical to evaluating a property prior to purchase. The Net Operating Income (NOI) minus the monthly principal and interest on the loan (debt service) is called “cash flow.”

Let’s break that down to determine how we arrive at this number.  (This is something we cover in great detail in the Rich Dad Education Elite Creative Financing course.)

To understand Cash Flow, we first need to define the following terms:

Gross Income – This is money received from the tenant(s) along with any other monthly income, such as money from vending machines, laundry fees, or parking fees.

Adjusted Gross Income – Gross income minus vacancy.  Vacancy rates are obtained from the property management firm.

Capital Improvements – The changes or additions that increase the value of the property. Exterior capital improvements could include replacing the roof, siding, and/or windows, exterior paint, paving, adding a pool, landscaping, etc.  Interior capital improvements might include remodeling the kitchen or bath, interior paint, new appliances, new floor coverings, the HVAC, etc.  

Cash Reserve – Money set aside per month for capital improvements made over a specified period of time. (Ex. 6 years)

Operating Expenses – Includes things such as property taxes; cash reserves; utilities (i.e. electric, water, gas, etc.); management, accounting and  legal fees; repairs; HOA; landscaping; maintenance; snow removal; pool service; pest control; etc. (Management expenses should average 6-8% per month.)

Net Operating Income – Gross income minus the vacancy rate minus all operating expenses. 

Total Cash Invested – The combination of down payment, closing costs, carrying costs and repairs.

Cash Flow – Once again, it’s net operating income minus the monthly principal and interest on the loan (debt service).  To determine the cash flow for the year, simply multiply the monthly cash flow by 12   The cash flow for the year divided by the total cash invested is called cash on cash return, which is a percentage for the year.

Cash on Cash Return will show the investor how much money he/she makes per year from cash flow only.  Cash on cash return is an important calculation to help the investor determine whether the amount of cash received meets the investor’s criteria.

By Richard Maryanski and Erik Maryanski

Rich Dad® Education Elite Training Mentors

 

For more information on this topic or similar topics, check out the following blogs.

http://blog.richdadeducation.com/2013/05/09/valuing-real-estate-and-the-importance-of-noi/

http://blog.richdadeducation.com/2013/05/29/return-on-investment/

 

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2 responses to “Principles of Investing: CASH FLOW

  1. Jordan June 4, 2014 at 12:01 am

    Hey,

    Firstly, I do apologise for writing this in the comments section! I could not find an appropriate place to contact any one at the Rich Dad Real Estate blog.

    I am the administrator of http://www.selectpropertyinvest.com.au. A large Australian website targeted at property investors that want to find investment properties within Australia. We are setting up a newsletter/blog and would love to run some of your blog posts through it in exchange for exposure to our community. Does this interest you?

    If so please e-mail me at info@selectpropertyinvest.com.au

    Thanks,

    Jordan

    • Rich Dad Education June 12, 2014 at 9:28 am

      Hi Jordan,

      We would love for your visitors to be able to enjoy our blog content. Please feel free to share our posts with your audience, along with a citation and link to the original article. Thank you for following us!

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