In this instructional video, Joe Homs explains the concept of cash flow in rental real estate, emphasizing that cash flow is the money left after all property expenses are paid. He highlights that investors use different formulas: a simple rent‑minus‑expenses method versus a more comprehensive approach that includes vacancies, repairs, and big‑ticket items like roof or HVAC replacements. Joe warns that omitting these hidden costs can turn a seemingly positive cash flow into a loss. He shares his own calculation method for the California market—starting with gross rent, subtracting utilities, HOA fees, property taxes, and other expenses—while generally not allocating a vacancy reserve due to low vacancy rates in the area. He targets a minimum cash flow of $200‑$400 per month and advises against purchasing properties with negative cash flow unless the investor has sufficient other income to cover the shortfall. The video concludes with a call to action to watch a related video on deal analysis.
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In today's video, I'm going to talk about cash flow and why it's important in your portfolio. Coming right up. Cash flow is important. We can all agree on that. The problem is not everybody can agree on what it really means. Welcome back to the channel. I'm Joe. Before we start, do me a favor and hit that little like button. Help me reach new and experienced investors like yourself, those who want to create the life they've always wanted through real estate. Cash flow is defined as how much money is left over after all the expenses are paid on a rental property. However, the issue can become slightly complicated when you take into consideration that not every investor uses the same formula. Some people take the rent, subtract monthly expenses, and call that cash flow. But this formula does not include those random expenses that you may not see coming, like repairs, vacancies, and big-ticket items. Like replacing the roof or an air conditioning unit. The danger is not including these items, and then you end up spending the cash flow that is generated. Then you find yourself left without anything to pay for vacancies and repairs. When others describe cash flow, they include every expense that they can even think of— vacancy at 10%, repairs at 10%, And so on. The problem with this formula is that it can make investing seem unprofitable. So which is the best way to calculate? In general, there are 2 uses for cash flow. The first is to have extra money to spend. The second is to protect your investment. So for example, what I do here in California is I'll take the gross rent. I don't necessarily subtract for vacancies because we have very, very little vacancies here in California, so I don't really need to attribute any percentage for that. Then we subtract all the expenses, and that's really important. So who's paying for the utilities? You may be paying for a portion. Who's paying, for example, if there's a homeowners association that's due? And that's usually the investor that pays for that. Property taxes are very important, so you want to get those big-ticket items subtracted from your income that's coming in from the rental, and then hopefully that there's a cash flow at the end of the day. Again, here in California, I'm looking for anywhere between probably $200 to $400 as a minimum cash flow. on a property. If I don't have that, I'm not going to end up buying the property. Let's say I'm making $2,000— I'm sorry, $200 a month, and that's about $2,400 a year. And if I have to buy some, you know, whatever, a garbage disposal, a new dishwasher, or whatever, that $2,400 can be gone quickly. And then I'm into my negative amounts. So be careful how you calculate your cash flow at the end of the day. Cash flow can mean different things to different people, but we can all agree that it's the money that you make after subtracting all the expenses from the income that you make. As you continue to learn more about real estate, pay special attention to the formulas we use so that you can figure out how much profit you're making at the end of the day. Or if you'll make any profit at all. As a general rule, you don't want to buy a property that has negative cash flow unless you have sufficient income coming in that you can take care of that negative cash flow. You want to know more about analyzing deals? Click on this video right here. You'll be able to spot cash-flowing properties in no time. See you on the next one.
