Cash Flow: In the Right Direction

Cash flow can be two of the most beautiful words in real estate, but, like the tide, cash can flow in two directions. It is overly simplistic to state that a positive cash flow is always the goal. In some cases the only profit in a property is the after-tax return on investment, but we will set that consideration aside for the moment and concentrate on a positive cash flow, as if that alone were the ultimate goal of investing. To achieve that goal, we must first understand what cash flow really is.

Cash flow sounds like it should be intuitive, and in a sense, it is. When all is said and done did you make or lose money on a particular investment? Intuitively, that is cash flow, be it positive or negative. Of course, cash flow is also the end result of a list of terms: gross scheduled income, gross operating income, and net operating income. Each of which plays an important role in understanding a potential investment's profitability. By understand each term, we can see the chain of income and expense that ultimately leads us to cash flow.

We being with gross scheduled income which is the theoretically highest possible income at a given rental rate. It assumes no vacancies. When you account for those vacancies, then you have the gross operating income.

Net operating income is what you have left after your standard operating expenses. Operating expenses for residential rental properties may include: real estate taxes, property insurance, repairs and maintenance, utilities, management, janitorial, and interior/exterior decorating. All that gets subtracted from the gross operating income to determine the net operating income.