What is Cash Flow in Real Estate

Formula & Definition

Cash Flow: Real Estate Analysis

Cash Flow is all of a property's cash inflows less all of its cash outflows during a given period of time. Inflows are counted whether or not they must be included as taxable income, and outflows are counted regardless of deductibility. For example, cash flow is affected by the entire amount of a mortgage payment, even though only the interest portion is deductible. Cash flow is not affected by a depreciation deduction, which is not a cash item.

When you speak about cash flow you usually mean cash flow before taxes (CFBT) which does not take into account the property's impact on the owner's income tax liability. Cash flow after taxes (CFAT) is the CFBT less any tax liability that arises from the operation of the property.

You can think of cash flow as the equivalent of the property's checkbook. It accounts for all of the money that flows in and all that flows out. Inflows can include rent, loan proceeds, and interest on bank accounts. Outflows can include debt payments, operating expenses, and capital additions.

How to Calculate Cash Flow of a Rental Property

  1. Calculate net operating income - it equals gross scheduled income less vacancy loss and operating expenses.
  2. Debt service is the total loan payment, including both interest and principal.
  3. Capital expenditures are additions having a useful life of more than one year or improvements prolonging the life of the property.
  4. Calculate cash flow before taxes using this formula: Cash Flow calculation

Excel Spreadsheet Example

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