Forecasting cash flow for your property is a crucial skill for property managers. It helps you plan your budget, track your performance, and identify potential problems. Cash flow is the difference between your income and expenses from your rental property over a period of time. In this article, we will show you how to forecast cash flow for your property in six steps.
The first step is to gather your data on your income and expenses from your property. You will need to collect information such as your rent, occupancy rate, vacancy rate, maintenance costs, taxes, insurance, mortgage payments, and any other fees or charges. You can use your historical records, market research, or estimates to get your data. Make sure to use realistic and consistent numbers that reflect your current and expected situation.
I agree ??. In industry parlance, the historical record of income and expenses is called the T12. The T12 should include all income expenses for the past 12 months broken down month by month. Please note some T12s do not include all expenses. These could be property taxes or insurance. Carefully review each expense line item to confirm all expenses are in there. Get copy of current rent roll too.
The next step is to calculate your gross income from your property. This is the total amount of money you receive from your tenants before deducting any expenses. To calculate your gross income, you need to multiply your rent by your occupancy rate and subtract your vacancy rate. For example, if your rent is $1,000 per month, your occupancy rate is 95%, and your vacancy rate is 5%, your gross income is $950 per month.
The third step is to calculate your operating expenses from your property. These are the costs that you incur to maintain and manage your property, such as repairs, maintenance, utilities, landscaping, property management fees, taxes, insurance, and so on. To calculate your operating expenses, you need to add up all the costs that you pay on a regular basis for your property. You can use a percentage of your gross income or a fixed amount per unit to estimate your operating expenses. For example, if your operating expenses are 40% of your gross income, and your gross income is $950 per month, your operating expenses are $380 per month.
Two of the biggest operating expenses are property taxes and insurance. Pending the location, properties can be re-assessed by the County upon sale and at a regular schedule interval. So be sure to know how your specific County goes about this process. The property taxes the current owner pays may be much lower than the property taxes the buyer will pay. Insurance costs have increased greatly so be sure to get current insurance quotes to plug into your analysis. The expense ratio is the expense cost expressed as a percentage of the gross rent. Expense ratio rules of thumb: Newer well maintained properties it will be 40%. 20 year old properties well maintained, op ex ratio will 45%. Older properties in need of repair will be 50%.
The fourth step is to calculate your net operating income from your property. This is the amount of money you have left after deducting your operating expenses from your gross income. It represents the profit that you generate from your property before paying your mortgage or debt service. To calculate your net operating income, you need to subtract your operating expenses from your gross income. For example, if your gross income is $950 per month, and your operating expenses are $380 per month, your net operating income is $570 per month.
The fifth step is to calculate your debt service from your property. This is the amount of money you pay for your mortgage or any other loans that you have taken to finance your property. It includes the principal and interest payments that you make on a monthly or annual basis. To calculate your debt service, you need to know the terms and conditions of your loan, such as the interest rate, the loan amount, the amortization period, and the payment frequency. You can use an online calculator or a spreadsheet to find out your debt service. For example, if you have a $200,000 loan at 5% interest rate for 30 years, and you pay monthly, your debt service is $1,073 per month.
The final step is to calculate your cash flow from your property. This is the amount of money you have left after paying your debt service from your net operating income. It represents the cash that you can use for reinvesting, saving, or spending as you wish. To calculate your cash flow, you need to subtract your debt service from your net operating income. For example, if your net operating income is $570 per month, and your debt service is $1,073 per month, your cash flow is -$503 per month.