Cash Flow Margin
Definition:
Cash Flow Margin is a financial metric used to measure the percentage of net cash flow generated by a property relative to its gross income. It helps investors evaluate how much of the property’s income is being converted into actual cash flow, after accounting for all expenses and debt service. A higher cash flow margin indicates that a larger portion of income is retained as profit.
🔍 Did You Know?
Cash flow margin is different from operating income, as it factors in all expenses, including debt service, which makes it a more accurate reflection of profitability.
Examples:
Example 1:
A rental property generates $100,000 in gross income, and after all expenses and loan payments, the net cash flow is $30,000. The cash flow margin is:
[ $30,000 ÷ $100,000 = 30% ]
Example 2:
An investor owns an apartment complex with annual income of $500,000. After accounting for $350,000 in expenses and debt service, the cash flow margin is:
[ $150,000 ÷ $500,000 = 30% ]
Why It’s Important:
Cash flow margin allows investors to assess how effectively a property is turning income into profit. A high cash flow margin suggests that a property is operating efficiently and is financially healthy, while a low margin may indicate high expenses or debt obligations.
Who Should Care:
- Real estate investors tracking the profitability of their properties.
- Lenders assessing the financial performance of an investment property.
- Property managers evaluating how well a property is being managed financially.
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