Learning how to calculate the cash flow a property makes is a crucial requirement in real estate investment. This way, you will know whether or not your business is generating passive income, and if you are building wealth.
Investing in short-term rentals without knowing how to calculate cash flow is a trap into which many investors succumb. So, don’t be a statistic, and learn how to calculate it for your own benefit!
As a short-term rental investor, a rental property calculator is your best friend when it comes to calculating cash flow.
The Rise of Short-Term Rental Properties
In recent years, short-term vacation rentals have gained popularity thanks to the flexibility they provide, catering to travelers who are looking to rent accommodation for a few days or months.
The most common types of short-term rental are furnished houses, condos, or apartments where guests feel like they are home. For some travelers, these types of accommodation are more appealing than hotels because of the amount of space and amenities they provide. Likewise, they are more affordable. These reasons and more make investing in a short-term vacation rental property lucrative.
These are just some of the benefits you will enjoy:
- More income – During the peak seasons and when there is a sporting event, festival, or convention in town, there will be more bookings, which could easily double or triple your regular monthly income.
- Flexibility – You will have the flexibility to increase or lower your rates when needed. For example, you can lower your rates during the off-season to attract more bookings and increase them during the peak season to maximize profit.
Aside from this, you will have the freedom to block off some calendar days (maybe you want to use the property yourself for a family vacation and whatnot) or set the maximum amount of days a guest can stay.
- Easy and low-cost marketing – Marketing your property for rent is usually free on many short-term rental listing platforms. However, you should prepare the property like a home and provide an excellent description and visual for it to stand out.
- Freedom to choose guests – Many short-term rental listings provide hosts with a guest rating system. You can review the guest’s ratings before accepting the deal.
How to Track Your Rental Property Cash Flow
To understand the cash flow figure, we break the process into three categories as follows
1. Cash flow from operations
Using a rental property calculator, you can determine your net operating income (NOI), which includes day-to-day costs, such as:
- Vacancy costs in percentage
- Management costs in percentage
- Property taxes
- Property insurance
- Property maintenance costs
- Business or short-term rental permit costs
The NOI comes from subtracting all these costs from the gross rental income of your property. Factor in the capital expenditures (CapEx) that do not occur frequently, like expenses from changing the cooling system or the roof. In fact, setting aside about 5% of the gross income as CapEx is an excellent way to shield yourself from cash flow setbacks.
2. Cash flow after financing
Calculating cash flow after financing ensures that you have enough left to pay for the mortgage. Use a vacation rental property calculator to find out how much you should pay each month, then deduct the figure of the cash flow from the expenses.
3. Cash flow after taxes
The resulting amount is the money you get to keep. But, it is not all yours yet!
You still need to pay your income tax bills. The amount you pay to the IRS all depends on the location of your property.
Using a Cash Flow Calculator
The goal of any Airbnb investment calculator or short-term rental cash-flow calculator is to help you determine if a property is worth your investment. Sometimes, the figures might not add up, but you could visualize enough green ticks to sign the deal anyway.
A cash flow calculator is an excellent tool to dispel any wishful thinking and bring an investor down to reality. One simply needs to provide the costs associated with a short-term rental property, and the calculator does the rest.
A select short-term rental property consultants provide tools that calculate the basic real estate metrics, which are the core of every investment. Some metrics to pay attention to include:
- Cash flow
- Capitalization rate
- Potential rental income
Use a rental property calculator to determine whether the short-term vacation rental on your mind is worthwhile; and if it is, the basic numbers will provide you with the financial background you need to make calculated long-term decisions.
Final Thoughts
A cash flow analysis is a must for every short-term rental property investment. Failing to conduct one puts you at risk of losing the property, especially when you do not project cash flow accurately using a holiday rental calculator. If you’re unsure about performing a cash flow analysis on your own, consider hiring a financial consultant for expert guidance and insights.
For more tips on improving your property and generating more income, check out our latest articles for inspiration!