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Cash flow is the lifeblood of your real estate investments, but during times of economic uncertainty, you may be left wondering how to get the most out of your cash flow properties.
Or, you might want to diversify your portfolio by expanding your cash flow properties and finding new investment opportunities. This can be especially helpful if you live in an expensive area but are willing to invest in a rental property elsewhere. But first, you need to understand the ins and outs of cash flow and how to find and analyze cash flow property.
Your cash flow is what you get if you subtract all your property-related costs from your total revenue in a month or quarter. Property that generates cash flow typically produces higher cash returns with a lower level of appreciation compared to similar real estate property. However, this is positive cash flow. You can also end up with negative cash flow where you need to contribute your own money to keep it afloat.
Cash flow enables investors to meet current financial duties and plan ahead for the future. In real estate, having a steady flow of cash is vital because it lets you:
To figure out a property’s cash flow, add up all possible sources of income and then subtract all costs to get the net cash flow.
Here’s an example:
Monthly rent: $1000
Vacancy rate estimate 5% = $750
Monthly expenses/losses:
Mortgage: $350
Property taxes: $230
Insurance: $56
Property management: $100 (often around 9-10% of rental income)
Vacancy reserves: $50 (roughly 5% of the rental income)
Repair reserves: $100 (about 10% of the rental income)
Total monthly expenses: $886
With reserves adjusted based on the property’s risk, age, and state.
Monthly cash flow is gross rental income – all expenses: $1000-$886 = $114
Consider the property’s possible debts, something you may have yet to factor in.
Other potential expenses that weren’t taken into consideration:
The next big step is learning how to find cash flow properties and evaluate them.
Finding the right real estate market for cash flow properties can be challenging, though there are some strategies experienced investors use to find these properties. Here is what some investors look for when locating cash flow real estate markets:
Experienced investors may also use the 1% rule to find good deals and to see if a property can create positive cash flow. In particular, the property is generating cash flow if it can earn at least 1% of the price it was bought for in rent.
For example, if you buy a property for $100,000, you should be able to rent it out for at least $1,000 per month to make money and meet the 1% rule.
Even though the 1% rule is a good starting point for figuring out whether or not a property will make money, there are other costs to think about:
If positive cash flow leads to profit and income, then a negative cash flow means that the cost of keeping the property running is higher than its value. Every investor must take these potential risks into account:
The key to choosing a property that gives you the correct balance and positive cash flow is to work with professionals who know the real estate market in the area where you hope to invest.
Just because you purchase an investment property, doesn’t mean it will generate positive cash flow. Having cash flow requires implementing a strategy. Here are several ways to increase the cash flow of your investment properties.
1. Solid business plan: Many people fail to see the significance of having a solid business strategy and anticipating potential outcomes. The objective should be to have a plan that considers how to acquire the next best property and how to maintain and improve its performance over time.
2. Selecting the best area: It’s all about the location, location, location. There will be a wide variety of neighborhoods and communities, each with its own set of benefits; likewise, certain real estate markets will be excellent for appreciation, while others will be better for future cash flow.
3. Buy low: The price of the property should be another important factor when determining cash flow. The higher the price, the higher the mortgage, and bringing down the price even by a few thousand dollars can have an impact on your cash flow.
4. Expenses: Reducing day-to-day running costs is a great way to boost cash flow. Understandably, you’d want to make your property as comfortable as possible, but that doesn’t mean you should go into debt doing it.
5. Add new amenities: Some renters are willing to pay more every month for extra amenities, like in-unit laundry or a dishwasher.
6. Use tax deductions: Claiming certain tax deductions can help lower your tax liability, such as business expenses and depreciation. Tax codes vary depending on the market, so contacting a professional may be the best course of action.
7. Team effort: In dealing with out-of-state properties and the requirement for a local partner that is in sync with your objectives, a real estate team with a firm grasp of cash flow is an invaluable asset. Anyone aware of your desire to increase your income flow would fall into this category, including leasing agents, real estate brokers, and property managers. Don’t forget to create an incentive plan to reward your efforts if your team is productive and works well together.
You need to make sure there’s more money coming in than going out. While this seems simple, there are several factors that can affect the cash flow a property produces.
There are a number of things that can help your cash flow, but there are just as many that can hinder it:
Finding cash flow properties is all about understanding the local market and making sure your investment’s cash acquired exceeds cash spent. If a property isn’t producing the desired cash flow, you may need to adjust your strategy.
Market research, a firm grasp of numbers, a careful assessment of costs and revenues, and a thorough examination of profit potential are all vital, but they can’t compare to the work of trained professionals. New Western helps investors find the best properties for their needs, risk preferences, and desired markets. Learn more about our process or get the latest investment property deals straight to your inbox.
Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
