What is a real estate investment property cash flow projection and how can I create one?

by vincenzo.murazik , in category: Real Estate Investing , 9 months ago

What is a real estate investment property cash flow projection and how can I create one?

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1 answer

by julius.brown , 9 months ago


A real estate investment property cash flow projection is a financial tool used to estimate the cash inflows and outflows related to owning and managing a rental property. It helps investors evaluate the profitability and financial performance of the property over a specific period of time.

To create a cash flow projection, follow these steps:

  1. Estimate Rental Income: Determine the potential rental income by analyzing market rents for similar properties in the area. Consider the type and size of the property, location, and any special features.
  2. Calculate Vacancy Rate: Estimate the percentage of time the property will be vacant. Multiply the potential rental income by (1 - vacancy rate) to get the expected rental income.
  3. Estimate Expenses: Identify all the expenses associated with the property, including mortgage payments, property taxes, insurance, maintenance costs, utilities, property management fees, and any other relevant expenses. Assign estimated costs to each category.
  4. Determine Net Operating Income (NOI): Subtract the estimated expenses from the expected rental income to calculate the property's NOI.
  5. Account for Financing: If the property is financed, consider the mortgage payments and interest rates. Subtract the mortgage payment from the NOI to calculate the cash flow after financing.
  6. Include Taxes: Consider the tax implications of owning the property. Deduct the estimated tax amount from the cash flow after financing to determine the cash flow before tax.
  7. Estimate Cash Flow: Subtract reserves for future repairs, capital expenditures, and any other expected discretionary expenses from the cash flow before tax. This will provide an estimate of the property's monthly or annual cash flow.
  8. Create a Pro Forma Statement: Present the cash flow projections in a clear and organized format, either on a monthly or annual basis. Include detailed information about income, expenses, financing, and taxes.

Keep in mind that a cash flow projection is based on estimates and assumptions. It is important to regularly review and adjust the projections as necessary to reflect actual performance.