How to Calculate Rental Property Cash Flow

What kind of things do you look for when looking for an investment property? It’s easy to get caught up with the purchase price, suburb growth and what the property might be worth in ten years, but there’s another calculation you need to know: cash flow.

Rental property cash flow is the money left over after the income from your property is weighed against the costs of owning it. Understanding this number before you commit to buying a property can give you a much clearer picture of how an investment could fit into your finances.

At Phone Homes, cash flow is an important part of assessing property investment opportunities because a property needs to work for your situation, not just look good on paper.

How do you calculate rental property cash flow?

This calculation is pretty straightforward: 

Rental income – property expenses = rental property cash flow. 

Let’s take a look at an example:

If an investment property brings in $650 per week in rent, that’s around $33,800 in gross rental income over a full year. You then need to subtract the costs associated with owning and running the property. These could include:

• Loan interest and finance costs
• Property management fees
• Council and water rates
• Landlord insurance
• Maintenance and repairs
• Body corporate or strata fees, where applicable
• Periods when the property may be vacant

If your income is higher than your expenses, the property is positively geared and is generating positive cash flow. If your expenses outweigh the rental income, you’ll generally need to contribute money yourself to cover the shortfall.

Our property investment services are designed to help investors look at these numbers as part of the bigger picture, rather than choosing a property based on just one benefit.

Cash flow and rental yield aren’t the same thing

This can be confusing for property investors. Rental yield tells you how much rental income a property generates relative to its value or purchase price. Cash flow goes further by considering the actual expenses involved in owning the property.

The fact is, a property can have an attractive rental yield and still leave you out of pocket once finance, management and other costs are considered.

To calculate gross rental yield, use this simple formula:

Annual rental income ÷ property purchase price × 100 = gross rental yield (%)

For example, if you buy a property for $600,000 and it rents for $650 per week, the annual rental income is $33,800. $33,800 ÷ $600,000 × 100 = 5.63% gross rental yield.

That’s why comparing potential properties should involve more than asking, “What rent can I get?” You want to know: “What could actually be left after the bills are paid?”

Don’t forget the less obvious costs of owning an investment property

When calculating investment property cash flow, leave room for unexpected costs. Properties need maintenance. Tenants move out. Interest rates can change. Insurance premiums and council rates can increase.

Running the numbers with realistic expenses, rather than an absolute best-case scenario,  can give you a better indication of whether the property suits your investment strategy.

You should also look at how financing affects the numbers. Phone Homes provides guidance around financing property investment as part of its broader property investment services.

Is positive cash flow always the goal?

Not always. Property investors have different goals. Some want immediate cash flow, while others are looking for potential long-term capital growth. Many want a balance of both.

The most important thing is to understand what role it needs to play in your overall portfolio.

Phone Homes’ ongoing property portfolio management and strategy considers the bigger picture, including rental demand, cash flow and long-term investment objectives.

There are also different structures to consider. For eligible investors thinking about retirement planning, property investment through an SMSF is another area that requires its own financial and strategic considerations.

Looking for an investment property in Australia?

A cash flow calculation is a great place to start, but it’s only one aspect of a successful property investment strategy. Location, rental demand, financing, property selection and your longer-term goals all matter.

Phone Homes provides an end-to-end property investment service in Australia, helping everyday investors navigate the process from initial strategy and property selection through to settlement and beyond. Contact us for more information. 

If you’re ready to explore your options, learn more about Phone Homes or get in touch with the team to start the conversation.