What Is Cash Flow in Real Estate?

Cash flow in property investment simply refers to the difference between the money you take in and what you spend. Positive cash flow means your income exceeds your expenses, and negative cash flow indicates the opposite. 

It’s a very simple concept but fundamental to real estate investment practices. A positive cash flow will provide an investor with continuous income and financial stability to reinvest in more properties. Understanding cash flow from real estate will help you make informed buying, holding, and selling decisions regarding property.

Why Do Investors Care About Cash Flow From Real Estate?

Cash flow is the lifeblood of real estate investing. It will dictate whether the property will become a financial liability or an asset. Consistent cash flow can provide for mortgage, maintenance, and other expenses. This padding in your bank account will help safeguard against market downturns or other cost surprises. High cash flow properties will also appreciate over time and increase your overall portfolio. The objective of anyone diving into real estate investing is to get the highest return on their investments. 

How to Calculate Cash Flow in Real Estate

Any serious real estate investor must learn to calculate cash flow. The investor will use these equations to understand the property’s profitability and thus be able to make a decent investment decision accordingly. Beyond the cash flow formula, you can use other valuable calculations to enhance the analysis: the CAP rate and the 1% rule. Here are the formulas for the necessary calculations: 

Real Estate Cash Flow Formula

This formula helps determine the profitability of a property by calculating the net income after all expenses.

Cash Flow = Total Rental Income − Total Operating Expenses (Operating Expenses + Vacancy Costs + Repair Costs)

Example of positive cash flow: Imagine you own a rental property that generates $3,000 per month in rental income. Your monthly operating expenses, including mortgage payments, property taxes, insurance, maintenance, and management fees, total $2,000. 

Using the cash flow formula:

$3,000 − $2,000 = $1,000 (Cash Flow)

In this example, the property provides a positive cash flow of $1,000 monthly, indicating a profitable investment. 

Example of negative cash flow: Let’s take the example above with a property generating $3,000 per month in rental income, but now the monthly operating expenses are $4000 because this property has a higher property tax and additional maintenance that must be paid for monthly. 

Using the cash flow formula:

$3,000 − $4,000 = -$1,000 (Cash Flow)

This example showcases a negative cash flow that indicates this wouldn’t be a profitable investment. 

1% Rule Calculation

The 1% rule is a guideline for a quick and easy way to check that the rental income will more than likely pay off most expenses, indicating some possible positive cash flow. Keep in mind that it is an estimation. Here’s how to calculate it:

• Determine the purchase price: Find out the total cost of the property, including any closing costs and necessary repairs or upgrades.
• Calculate 1% of the purchase price: Multiply the purchase price by 1%.

Purchase Price × 1% (0.01) = Estimated Cash Flow

Example 1% rule calculation: Suppose you are considering buying a property for $200,000. To apply the 1% rule:

1% of Purchase Price = $200,000 × 0.01 = $2,000 (Estimated Cash Flow)

According to the 1% rule, the property should generate at least $2,000 monthly rental income to be considered a good investment. If the expected rental income meets or exceeds this amount, the property will likely provide positive cash flow, making it a potentially sound investment.

Cap Rate

Using the cap rate formula, also known as the capitalization rate, will be beneficial when comparing the potential return on investment among different properties. This calculation is more complicated and involves a few extra steps. 

Net Operating Income (NOI) / ​Purchase Price = Cap Rate 

Step 1: Determine net operating income (NOI): Calculate the annual rental income and subtract all operating expenses.

Total Rental Income − Total Operating Expenses = NOI

John owns a rental property that generates $3,000 monthly in rental income, totaling $36,000 annually. His annual operating expenses, which include mortgage payments, property taxes, insurance, and maintenance, amount to $1,000 per month, or $12,000 per year. Calculate his NOI below: 

$36,000 (Rental Income) − $12,000 (Operating Expenses) = $24,000 (NOI)

Step 2: Determine Purchase Price: Find out the total purchase price of the property. The total purchase price can include the property cost, closing costs, inspection fees, and necessary repairs or renovations.

$250,000 (Property Price) + $15,000 (Closing Costs) + $34,600 (Repairs/Renovations) + $400 (Inspection Cost) = $300,000 Purchase Price

Step 3: Calculate the Cap Rate using the above formula (NOI / Purchase Price = Cap Rate)

$24,000 (NOI) / $300,000 (Purchase Price) = 0.08 or 8% (Cap Rate)

In this example, the property has a cap rate of 8%. This percentage means the property generates an 8% return on investment based on its net operating income. A higher cap rate generally indicates a more profitable investment.  

What Factors Affect Cash Flow? 

Several factors may impact cash flow in real estate investing, so it will be important to understand the variables to maintain positive cash flow. Here are the critical elements that influence cash flow most:

• Expenses: Large negative cash flow items include operating expenses like mortgage payments, property taxes, insurance, maintenance, utilities, and property management fees. Other current and nonrecurring expenses that impact your profitability might include major repairs or emergency maintenance.
• Rental income: How much you can charge for rent depends on location, property condition, and market demand. High vacancy or high turnover rates lower rental income, hurting cash flow.
• Rental vacancies: The more vacant a property is, the less rental income will be collected. Effective tenant retention strategies and rigorous screening processes will help minimize vacancies and keep cash flowing.
• Market conditions: Economic conditions, interest rates, and local real estate markets drive rental rates and property values. Shifts in these can negatively or positively affect cash flow.
• Property management: Good property management keeps rent collection, maintenance, and tenant relations in check to provide steady cash flow. Poor management increases vacancies and raises expenses, which will cut profit margins.

By keeping these factors in control, investors can have an inflow of cash to make real estate investing profitable and sustainable.

Baselane’s rent collection platform is an excellent avenue to stabilize your rental income. Baselane provides automated payment reminders and seamless online payment options to minimize late or missing payments. This ensures timely reception of your rental income every single time. The platform also provides detailed tracking and reporting features that allow landlords to monitor payments and manage finances more efficiently. 

Baselane will help property owners maintain consistent income, reduce administrative work, and focus more on growing real estate investments.

Tips to Increase Cash Flow

Increasing cash flow in real estate requires raising income and reducing expenses. Having a strategic approach to managing your properties as a part of your investing business plan can radically improve profitability. Here are some hands-on tips for maximizing the cash flow of your real estate:

• Increase rental income: Renovate the property, add amenities, consider short-term rentals, and adjust the rent to make it more marketable.
• Reduce vacancies: Enforce tenant screening and incentives for lease renewal, and maintain good relations with tenants.
• Lower operating expenses: Check insurance rates, compare property management fees, maintain the property, and invest in energy-efficient upgrades.
• Optimize financing: Refinance your loan, pay off that high-interest debt, and find alternative ways to finance your purchases.
• Increase efficiency: Implement real estate management software, preventative maintenance, and monitor cash flow regularly.

Frequently Asked Questions (FAQs)

What is a good cash flow ratio in real estate?

How do you make sure a property's cash flows?

What type of real estate has the most cash flow?

Bringing It All Together

Positive cash flow in real estate is considered the central factor in any successful property investment. After all, the objective of investing is to make money, right? Every investor must take time and perform due diligence before investing in any property. That includes performing market analysis, properly calculating potential income and expenses, and considering improvements needed for the property to gain a higher rental value. 

Look for properties with potential for solid cash flow, such as multifamily units or short-term rentals in hot spots. Run those properties professionally, tracking their financial performance closely to adjust your strategy as you go. Keeping an eye on financial performance and tweaking your plan as needed will help keep that cash flowing to ensure your real estate ventures are not just profitable but can also provide you with some enjoyment.

The post Cash Flow in Real Estate: Overview, Definition & Calculations appeared first on The Close.

• Kiavi: Best for rapid financing for quick property flips
• RCN Capital: Best for investors requiring large loan amounts 
• Lima One Capital: Best for loan products for every type of investment strategy 
• Groundfloor: Best for new investors with crowdsourced loan opportunities
• The Investor’s Edge: Best for personalized investment strategies through one-on-one consultations
• New Silver: Best for tech-savvy investors seeking fast, data-driven loan approvals

Type of Software	Best for	Available markets	Learn More
	Obtaining quick financing for your projects	32 states plus Washington, D.C.	Kiavi ↓
	Investors needing large loan amounts	All states except AK, NV, ND, SD, and VT	RCN Capital ↓
	Loan products for every type of investment strategy	46 states plus Washington, D.C.	Lima One Capital ↓
	New investors with crowdsourced loan opportunities	Nationwide	Groundfloor ↓
	Investors that need 1-on-1 assistance with their projects	39 states	The Investor’s Edge ↓
	Investors needing instant loan approvals	39 states	New Silver ↓

Type of Software	Best for	Available markets	Learn More
	Obtaining quick financing for your projects	32 states plus Washington, D.C.	Kiavi ↓
	Investors needing large loan amounts	All states except AK, NV, ND, SD, and VT	RCN Capital ↓
	Loan products for every type of investment strategy	46 states plus Washington, D.C.	Lima One Capital ↓
	New investors with crowdsourced loan opportunities	Nationwide	Groundfloor ↓
	Investors that need 1-on-1 assistance with their projects	39 states	The Investor’s Edge ↓
	Investors needing instant loan approvals	39 states	New Silver ↓

Kiavi: Best for Rapid Financing for Quick Property Flips

Pros Has no application fees Can close in as little as 7 days Offers experienced customer support Lends to business entities	Kiavi Rates & Terms Interest rate: 9.25% to 12% interest only Loan-to-value ratio (LTV): 95% LTC (loan-to-cost), up to 100% of rehab costs, 80% ARV (after-repair value) Upfront fees: No upfront fees; 2% to 3% origination fee Term: 12 to 24 months Credit requirement: 650 FICO score, no hard credit pull Min and max loan amount: $75,000 to $3 million Prepayment penalty: Yes Property types: Single-family homes, attached and detached planned unit developments (PUDs), and 2-4 unit rentals
Cons Is not available in all states Requires appraisal for rental loans Cannot get long-term financing as a prepayment penalty

Why I Chose Kiavi 

I chose Kiavi as one of the best hard money lenders for rapid financing for quick property flips because of their efficient loan processing. They specifically offer fix and flip loans with rates as low as 9.25%. Because of their swift financing process, inventors can compete with all-cash buyers on new purchases. Their application process bypasses tedious paperwork like pay stubs and W-2s, as their technology can cut through the clutter and get you approved quickly.

Additional Features

• Prequalification: With just a soft credit pull, real estate investors can prepare to make quick offers on any opportunities that arise. 
• Flexible loan amounts: With loans up to $3 million, Kiavi can accommodate small renovations and large-scale projects.

RCN Capital: Best for Investors Requiring Large Loan Amounts

Pros Can close in as little as 10 days Has in-house loan approvals Has dedicated customer service Has funding for new construction projects	RCN Capital Rates & Terms Interest rate: 9.99%% to 12%, interest only; varying based on investing experience Loan-to-value ratio: Up to 90% of the purchase price, 100% of renovation cost (not to exceed 75% of ARV) Term: 12 to 18 months Upfront fees: No upfront fees. 1% to 5% origination fee Credit requirement: 660 minimum credit score Maximum loan amount: $2 million generally, up to $2.5 million for properties with 5+ units Prepayment penalty: None Property types: Condo, townhouse, single-family, duplex, multiunit, mixed-use; not for owner-occupied properties
Cons Has no nationwide coverage Requires appraisal for all loans Has a minimum loan amount that may be high for new investors Has no funding for owner-occupied residential properties

Why I Chose RCN Capital

I selected RCN Capital because it’s one of the hard money lenders for real estate that offers loans up to $2.5 million. This amount is significantly higher than many other hard money loan lenders, making it ideal for investors handling large-scale developments or multiple rental properties. RCN determines the maximum loan value based on the loan program and the value of the real estate asset as collateral. Unlike more tech-forward lenders, RCN requires a typical application process to include credit reports, background checks, bank statements, property appraisals, etc.

Additional Features

• Rehab budget builder: This tool is available to help investors analyze their investments to understand cost, risk, ROI, etc.
• Video Library: It includes up-to-date videos that offer market updates, investment tips, and motivational content.

Lima One Capital: Best for Loan Products for Every Type of Investment Strategy

Pros Has clearly outlined loan terms Approves loan in under ten days Has a simple renewal process once approved Has an established investor referral program	Lima One Capital Rates & Terms Interest rate: 9.6% to 12% interest only Loan-to-value ratio: 92.5% of LTC, 75% ARV Term: 13 to 24 months Upfront fees: 1% to 2.25% of the loan amount Credit requirement: 620 minimum credit score, 660 for inexperienced borrowers, options for nonrecourse and soft credit pulls available Maximum loan amount: $3 million Prepayment penalty: None Property types: Townhouse, single-family, multiunit up to 4; not for owner-occupied properties
Cons Has limited coverage in certain states Might require personal guarantees Requires high credit scores for some programs May not be a good option for new investors

Why I Chose Lima One Capital

Lima One Capital’s extensive range of loan products makes it the best hard money lender for supporting every type of investment strategy. Even within each loan product, like fix and flip loans, there are multiple financing options for flipping, fix-to-rent, and bridge loans. They also provide loans for rentals, new construction, multifamily properties, and short-term rentals. In addition, they offer investors a variety of loan terms and structure options like loans from 13-24 months, nonrecourse, single loans, and portfolios. Best of all, investors only have to pay interest on what they draw and not on unused funds.

Additional Features

• Case studies: Detailed case studies on their website illustrate the strategies, financial figures, challenges, and outcomes of real-world property investments.
• Podcast: A podcast covers various topics relevant to real estate investing and provides ongoing education and industry insights in an easily accessible audio format.

Groundfloor: Best for New Investors With Crowdsourced Loan Opportunities

Pros Has no hard credit pulls Has deferred payments available Has minimum loan amount of $50,000 Has no minimum transaction experience	Groundfloor Rates & Terms Interest rate: Starting at 7.5% Loan-to-value ratio: 80% to 100% of LTC, 70% of ARV Upfront fees: $495 evaluation fee, 2.75% to 4% origination fee (can be financed), $1,200 doc prep fee Credit requirement: 650 minimum credit score Maximum loan amount: $75,000 to $750,000 Prepayment penalty: None after three months Property types: New construction, condo, townhome, single-family, multiunits up to four
Cons Requires a higher minimum credit score Has a minimum interest requirement for prepayment Has a longer application closing timeline Has high closing fees

Why I Chose Groundfloor

Groundfloor is ideal for new investors because of the lack of transaction experience required. They are one of the national hard money lenders that allows investors to start with smaller amounts and gain experience in real estate financing. The trade-off for a lack of investor experience is that Groundfloor will require a higher credit score. They provide a comprehensive education hub for investors to access videos on growing wealth and budgeting their finances. I also found that their crowdfunding investment options offer a great opportunity for new investors to invest in real estate without taking on the purchasing burden.

Additional Features

• Blog: A regularly updated blog provides insights, updates, and educational content related to real estate investing and personal finance.
• Debt service coverage ratio (DSCR) loans: Long-term loans are available based on cash flow generated by the property instead of loan approvals based on the investor’s income. 

The Investor’s Edge: Best for Personalized Investment Strategies through 1:1 Consultations

Pros Has 100% funding options available Is ideal for new investors Offers free lending consultation Has available funding for multiple properties	The Investor’s Edge Rates & Terms Interest rate: 12% to 18% interest only, with the option to roll monthly interest payments into the final payoff statement. Loan-to-value ratio: 80 to 100% of LTC, 75% of ARV Upfront fees: $495 evaluation fee, 3% to 5% origination fee (can be financed), $1,200 doc prep fee Credit requirement: No minimum credit score Maximum loan amount: $250,000 for 100% loans, $1 million for all others Prepayment penalty: None Property types: New construction, condo, townhome, single-family, multiunits up to 4
Cons Has higher interest rates compared with competitors’ Can take up to 12 days to approve loans Has website information that can be overwhelming to new investors Does not clearly list loan details

Why I Chose The Investor’s Edge

I am a fan of The Investor’s Edge as the best for personalized investment strategies due to their focus on partnering with investors and their projects. They offer free one-on-one consultations to help investors identify which investment strategies will help them reach their financial goals. Beyond the consultations, the team at The Investor’s Edge team will help investors identify, fund, and sell their properties. I also appreciate the availability of informative courses tailored to home and land flipping for new investors.

Additional Features

• Gap financing: It is a type of short-term loan available to investors that covers the difference between the total funding needed for a project and the principal amount already secured. 
• The Investor’s Edge Software: It is a comprehensive tool designed for investors to efficiently perform real estate market analysis, property valuation, and investment strategy planning. 

New Silver: Best for Tech-savvy Investors Seeking Fast, Data-driven Loan Approvals

Pros Provides instant proof of funds documents Has no hard credit pulls Offers repeat borrower discounts Offers immediate online approval	New Silver Rates & Terms Interest rate: 10% to 12.75% interest only Loan-to-value ratio: 90% of LTC, 80% of ARV Term: Up to 24 months Upfront fees: 1.875% to 3% origination fee ($3,500 minimum, can be financed), $759 underwriting fee, $1,250 legal fee, $350 doc prep fee Credit requirement: 650 minimum credit score; no hard credit pull Maximum loan amount: $100,000 to $5 million Prepayment penalty: None Property types: Residential 1 to 12 units, including single-family, condo, and townhomes; multifamily up to 50 units
Cons Has fees for appraisals Has no closing cost credits Limits the maximum size to 5 acres for fix and flip loans Only offers loans for residential properties with 1 to 50 units

Why I Chose New Silver

New Silver is one of the hard money loan lenders ideal for tech-savvy investors because of its efficient, AI-driven loan approval processes. Investors can get instant online approval in just five minutes and close in as little as five days. Loans secured through real estate collateral only require a soft credit pull in addition to the property’s value. They do not need income verification for loan approval. I appreciate the platform’s focus on streamlining the lending process, which minimizes paperwork and accelerates the timeline from application to funding.

Additional Features

• Advantage program: It has enhanced loan terms and rates to repeat borrowers who have successfully completed previous projects with New Silver. 
• Fintech scholarship: It has an initiative to support students pursuing studies in financial technology-related fields. 

What Is a Hard Money Lender? 

Hard money lending companies provide specialized financing where real estate property is pledged as collateral. They are much different from a traditional lender, such as a bank, which first and foremost bases its decisions on a borrower’s credit history and income when deciding whether to approve a loan. 

Hard money lenders focus primarily on the property’s value and potential. This focus on asset value, not creditworthiness, makes hard money loan lenders quite applicable in real estate ventures where time is of the essence to maximize new investment opportunities. 

Pros & Cons of Hard Money Loans 

Hard money loans are one of the most popular financing options for real estate investors because they provide quick turnaround on projects where traditional funding may not be possible. The table below identifies all the pros and cons related to hard money loans that investors should be aware of when considering this financing option:

How to Know if You Need a Hard Money Lender

Knowing whether a hard money lender is the proper fit for your real estate financing involves many considerations. Most hard money loans are designed for unique situations or circumstances that traditional funding just can’t handle. The following is a closer look at situations where you should consider a hard money lender:

• Quick funds are needed: You require quick financing to secure a real estate deal before potential competitors.
• Credit issues: Traditional financing isn’t an option due to credit issues or unconventional income that doesn’t satisfy typical bank requirements.
• Short-term financing: For projects like fix-and-flips or bridge loans, you need short-term financing.
• Investment opportunities: You encounter a real estate investment opportunity that requires immediate action that conventional funding sources cannot meet.
• Renovation projects: You need financing for purchasing properties that require significant repairs that traditional banks may not finance because of their condition.

How to Choose the Best Hard Money Lenders

The right lender can make or break your investment. Keeping these factors in mind will put you in a better position to know when you really need a hard money lender and how to be sure you are selecting an appropriate one for your specific financial and project goals. This evaluation allows you to work with the best lender possible for the most optimal terms possible for your investment strategy. Here is how to choose the right hard money lender:

1. Evaluate lender reputation: Research the lender’s track record, customer reviews, and industry reputation to ensure they are reliable and fair.
2. Understand the terms: Fully comprehend all loan terms, including interest rates, fees, loan-to-value ratio, and repayment schedule.
3. Assess the speed of funding: Since time is often critical, assess how quickly the lender can process and fund the loan.
4. Professional advice: Consider consulting with a financial advisor or real estate professional to help navigate the process and select the best lender for your specific needs.
5. Compare multiple offers: Don’t settle for the first lender you meet. Compare different offers to find the best terms and rates.
6. Check for transparency: Ensure the lender is transparent about all costs, fees, and any penalties associated with the loans. 

Methodology: How I Chose the Best Hard Money Lenders 

To find the best hard money lenders of 2024, I devised a rigorous methodology focused on the most critical factors to create an unbiased review. I reviewed various lenders against multiple key factors to ensure I viewed them through the lens of what would be most important to a real estate investor. The detailed analysis then isolated lenders that support good, solid financial solutions and blend well with various investment strategies and goals. 

Here are the key factors considered:

• Interest rates and loan terms: Assessed the competitiveness and flexibility of each lender’s offerings.
• Speed of loan processing and funding: Evaluated how quickly each lender processes and disburses funds, a crucial factor for time-sensitive investments.
• Lender reputation: Examined customer reviews and industry feedback to gauge each lender’s reliability and overall customer satisfaction
• Transparency: Focused on how openly each lender communicates fee structures and loan conditions, ensuring no hidden costs exist.
• Geographical coverage: Considered the availability of services across different regions to accommodate investors in various locations
• Target audience suitability: Analyzed which types of real estate investors (e.g., fix-and-flippers, buy-and-hold investors, and commercial developers) each lender best caters to based on their product offerings and specialty areas

Frequently Asked Questions (FAQs)

What are the typical interest rates for hard money loans?

How quickly can I receive funding from a hard money loan?

What are the typical financing terms of a hard money loan?

Your Take

Investors should look for the best hard money loans that fit the needs of your project and financial goals. Consider a lender that offers flexible terms of the deal, transparent structures of the fees charged to the investor, and competitive rates of interest. Additionally, the lender should have an impressive, reputable status in the industry, characterized by positive testimonials from clients, with reliable transactions that give value to the money. The right hard money lender will do more than just finance an investment. They will also support the investor’s overall strategy and want to contribute to their success.

The post The Best Hard Money Lenders of 2024 (Interest Rates, Fees & More) appeared first on The Close.