While making investment decisions, we need to understand the cash flow implications. In property investments, the main cash inflow is rental income and the main cash outflow is the mortgage repayment. By subtracting the two, we can understand whether our money is going in or going out.
To estimate rental income, the capitalization rate is often used with reference to the market average. It is defined as rental income per year divided by purchase price. If you are maths sensitive enough, you may figure out that capitalization rate changes with rental income since the purchase price is fixed. Therefore, not only you should calculate the cash flow on the purchase, but also the expected cash flow in the coming few years. The cash flow calculated may be negative in the first few years but positive afterward if rental income increases.
