Annual Net Cash Flow 

When evaluating an investment property, using rental metrics and analytics is crucial for making informed decisions. Metrics provide a clear picture of a property’s current or potential financial performance, helping investors gauge profitability and mitigate risks. Annual net cash flow is one metric that can help investors optimize their portfolios, ensuring they make the most out of their real estate ventures.  

What is Cash Flow? 

Annual net cash flow is one of the key signifiers of success and health for any business. Put plainly, annual net cash flow is the money left over after you have collected all income and paid all expenses for your rental property. As the name suggests, annual net cash flow is measured on a yearly basis, which is likely to give a fuller picture of the long-term health of your rental business.  

Though cash flow may seem simple and straightforward on the surface, there is a lot of power behind the ability to know, estimate, or predict this metric in rental property investing. Revenue is critical to the success of your business, and the ability to parse the different variables that ultimately make up the calculation will allow you to determine exactly which factors contribute to a higher or lower revenue than expected. In fact, if you calculate a negative cash flow, it can point to an inability to pay your debts and sustain your business.  

Let’s take a closer look at how to calculate cash flow and the individual components used in an annual cash flow calculator. 

Annual Net Cash Flow Formula 

The annual net cash flow formula is a relatively simple equation, consisting of a few variables. The formula is as follows: 

Annual Net Cash Flow = Net operating income (NOI) – Debt service  

As you can see, there are two main components: your net operating income (NOI) and your debt service, or mortgage payments. 

NOI is the rental income left over after all regular, monthly expenses are subtracted. Thus, it is calculated using this formula: 

NOI = Gross cash flow – Gross operating expenses 

Gross cash flow is simply all the income you generate or expect to generate from a rental property. However, it is important to subtract vacancy loss from total rental income when calculating gross cash flow. Vacancy loss is the income lost due to vacancies in rental units throughout the year, and it can be found by multiplying the monthly rate by the number of months that the property has been vacant throughout the year.  

The other half of the NOI formula, gross operating expenses, is the sum of all your regular expenses required for day-to-day operating of the property. By subtracting your gross operating expenses from gross cash flow, you’re left with your NOI. Then, all that’s left to do is subtract the cash paid towards your mortgage obligation, and you’re left with your annual net cash flow. 

When to Use Annual Net Cash Flow 

Conducting a cash flow analysis on your property is a great idea at any point in the investment process, whether you are evaluating an existing property you operate or estimating whether a potential investment will pay off in the future. 

Annual net cash flow can be a key indicator of the state of your business. With the specificity of the different variables you are using, cash flow calculators give you a chance to determine which variables are having an impact—either positive or negative—on your cash flow. Knowing how profitable your rental properties are, and how much influence certain financial variables have on its profitability—is a great way to fine-tune your rental business and ensure that you can balance investment with profit. In fact, it’s a good idea to draw up a cash flow statement for each of your rental property investments each year. 

How to Use the Annual Net Cash Flow Calculator 

While you’ll have to determine the exact or expected variables to include in the formula, our cash flow calculator is designed to be easy to use to save you time and effort. Your focus should be on scrutinizing your variables to see what combination could produce the most effective result for your business. 

Inputs 

Here are the inputs that you will need to use in the calculator: 

1. Annual rental income 
2. Vacancy loss 
3. Gross operating expenses 
4. Monthly mortgage payment 

Annual rental income is every bit of income that you generate from all aspects of a rental property or business each year. This includes the following income sources:

• Rent
• Pet rent
• Non-refundable deposits (e.g., nonrefundable pet deposits)
• Utilities
• Parking fees
• Any other income you receive for the use and/or occupation of a property

Vacancy loss is the amount of income you lose or expect to lose from vacancies throughout the year. If your property lies vacant for a month each year, your vacancy loss would be at least 1 times the monthly rent. 

Gross operating expenses are the sum of all non-variable regular expenses you expect to incur from a property over the course of a year. These include: 

• Property management fees (including software fees) 
• Advertising and listing fees 
• Landlord insurance premiums 
• Property taxes 
• Cleaning and maintenance fees 
• Supplies 
• Travel costs if you travel to your office/properties 
• Legal fees 
• HOA fees 
• Utilities you cover 

The last variable, your monthly mortgage payment, is simply the amount of principal and interest you pay towards your mortgage loan each month. Multiply this by 12 and you get your debt service, your total debt payment over the year. Debt service is used to calculate your annual net cash flow. 

Output 

After you’ve entered each of the four variables listed above, the calculator will output your annual net cash flow. This will help you to complete an estimated or projected cash flow analysis. 

How to Interpret Your Annual Net Cash Flow 

What is a good cash flow? 

As we mentioned earlier in this article, it is possible for your net cash flow to be in the negative. It goes without saying that this is a bad cash flow, as it means that your expenses are too overwhelming for your income to handle. If this is the case, you will likely need to adjust your strategy to maintain your property’s sustainability.  

Positive cash flow means your property is generating a profit. A good annual net cash flow is considered in the framework of the number of units you are renting.  

Keep in mind that what you consider a “good” cash flow varies depending on many factors, including how much you spent on the initial investment or whether you consider the property primarily a “cash flow” or “appreciation” investment (or a combination). It is also important to note that when making a projection or estimation, there are potential variables outside of your control, such as rental markets or unexpected maintenance costs that may impact your calculation. Your goal should be to aim for a safe enough margin to protect your business from being dramatically affected by those circumstances. 

Conclusion 

Wherever you are in the investing process, conducting a thorough and thoughtful cash flow analysis is a helpful step in determining your next steps. Innago’s annual net cash flow calculator is designed to make this essential step a little easier so that you can spend more time and effort invested in making informed decisions about your rental business. You can access the rental property calculator at the top of this page.