There is no doubt, the point of investing is to receive income and the term cashflow is mentioned everywhere, but what is actual positive cashflow? In simple terms, Cash flow refers to the profits you collect each month from the property. The way it works is you collect the rent from the tenant (gross income) and subtract your expenses (mortgage, taxes, insurance, repairs, management fees, vacancies, etc.) and that leaves you with your cash flow (net income).
Steps to calculate your cashflow:
Find Monthly Rent: This will be the current rent the tenants are paying, or talk to a local real estate agent that can provide you a market rent value for the property.
Calculate monthly expenses: These include property taxes, insurance, property management (if applicable), mortgage (if applicable), condo fees (if applicable), rental licensing (if applicable) vacancy and repairs. Never forget vacancy and repairs, these are real parts of any property investment and can substantially affect cash flow, yet many choose to leave them out of the equation. Vacancy rate I typically use is 3-5%. Repairs I typically use 5% if the property is in good condition, up to 20% if the property is rundown.
Subtract the monthly expenses from your monthly income. If it is positive, Congrats, you found a great investment, if not, you might reconsider the purchase or consider making some capital expenses that could increase your income.
There are always risks associated with investing in real estate, but keep in mind that in Waterloo Region real estate tends to appreciate every year and that can affect your bottom line.