Many potential investors are drawn to the idea of purchasing rental property—not just multi-family buildings—due to the notion that this type of investment can generate a lot of revenue. While it does have the potential to do so, it’s not without challenges that are sometimes out of your realm of control.
Before purchasing a multi-family investment property, it’s strategic to roughly calculate how much you could earn from that particular building. Multi-family buildings differ; they don’t all have the same number of units or revenue sources. Your potential income will largely reflect how many units are available to rent out.
How to Calculate Cash Flow for Your Multi-Family Building
When buying multi-family investments, it’s important to buy a building with a positive cash flow that will make you money each month. Depending on property appreciation is risky and may not happen. A positive cash flow will allow you to keep operating the property while receiving a profit.
At a basic level, cash flow is the amount of money you’re left with after the bills have been paid. To calculate cash flow, one can use the seemingly simple equation of cash flow = total income – total expenses. When it comes down to it, this equation seems hard to get wrong, right? Well, the complex nature of income and expenses can make it more difficult than you suspect.
In straightforward situations, the total income would equal the amount of total rent, but it doesn’t happen often. Many multi-family buildings have additional revenue sources to make the property more profitable. Additional income sources can include laundry services, pop machines, application fees, late fees, and more. When trying to determine the total amount of income, it’s strategic to list out all the possible revenue sources and the amount they can generate. For this part, you’ll probably have to do some digging to find how much you stand to make. However, it’s better to be on the more conservative side rather than optimistic. You don’t want to overestimate how much you’ll actually be making.
When you look at the total amount of expenses, things can get a little tricky. If you miss even one expense, especially if it’s a big one, your potential cash flow total may be greatly skewed and unreliable. Investors may think they’ll be able to turn a profit when in reality they could be looking at a negative cash flow property. For multi-family rental properties, there will be a lot of expenses that need to be paid. A few of those expenses will include big bills like the mortgage, insurance, property taxes. On a smaller scale, you can expect expenses for maintenance, upkeep, water, garbage, new appliances, and advertising. As you can see, there’s a lot of expenses here, and they only skim the surface. To make matters tricky, some costs reoccur monthly, and some are only paid annually. For those that don’t occur monthly, calculate a certain percentage of them when planning ahead. Costs such as gas and office supplies shouldn’t be ignored either. Although they seem small, these expenses can add up quickly. If you’re not a calculator, use online cash flow calculation tools such as this one.
The size of multi-family building you’re looking at will largely determine your cash flow number. Although small apartment buildings will generate less rental income compared to a larger one, they may have less costly repairs due to their size. Bigger multi-family buildings, on the other hand, will have higher expenses and but more income.
Before you purchase a multi-family building, it’s important to realistically guestimate how much cash flow you’ll receive each month. You want to make sure it’s a positive number, not a negative one. To calculate cash flow, follow the easy equation of total income - total expenses = cash flow.