How to Find the Best Cash Flow Investments in Real Estate: 5 Steps
1. Set Your Real Estate Investment Goals
If you don’t have a vision when searching for the best cash flow investments, you will end up wasting a lot of time and effort without getting anything in return. Whether you are investing solo or as part of real estate investment partnerships, the first step is to identify your goals. In real estate, investment property comes in different forms such as multi family homes, single family homes, condos, and apartments. The first step is to carry out some research and decide what kind of investment property would work best for you.
In addition, you need to think about the kind of real estate investment strategy you want to pursue. For instance, do you want to buy and flip, or buy and hold? Which one will actually generate steady and reliable cash flow in the long run? What real estate rental strategies are you interested in- Airbnb rental strategy or a long-term rental strategy? Decide your investment strategy before you begin hunting for the best cash flow investments.
2. Choose Where to Invest
Location is a very important consideration when looking for the best cash flow investments. It would not make sense to buy a great piece of property in a bad location. The place where you choose to invest will depend on the type of property and investment strategy you selected. For instance, if you are planning to invest in an Airbnb property, you need to find areas that offer a high return for short-term rentals. To make the right decision about the best cash flow investments, you need to analyze a wide range of metrics including listing prices, Airbnb occupancy rate, CoC return, appreciation rate, traditional occupancy rate, and optimal rental strategy. Don’t forget to look at rental property tax deductions during your real estate market analysis.
3. Find the Right Neighborhood
Though there is a lot of data available on the real estate markets of major US towns and cities, not much information can be found for neighborhoods. Still, a neighborhood analysis is very important when trying to find the best cash flow investments. Here are two reasons why you need to conduct a thorough neighborhood analysis:
- Though the numbers for a general housing market could look amazing, the data for a specific neighborhood can tell a different story
- Narrowing down your search to an exact neighborhood allows you to reduce the potential best cash flow investments to a few that match your criteria
Neighborhood analysis should involve both the numbers and features of the best cash flow investments. The numbers should include cap rate, cash on cash return, occupancy rate, and expected rental income. You can find this kind of data on Mashvisor. When it comes to features, make sure the neighborhood complements the investment strategy and type of rental property you selected. For instance, if you want to buy single family homes or multi family homes, look for neighborhoods that are located close to school districts.
Related: Neighborhood Analysis in Real Estate Investing
4. Conduct Investment Property Analysis
Now that you are searching for property in a smaller area, narrow down your list of the best cash flow investments based on your investment goals. At this point, you’ll need to conduct an investment property analysis to find the right one. Using a rental property calculator, you can quickly analyze numbers such as:
- Cash flow – This shows the annual or monthly profit from an investment property. A break even or negative cash flow is a red flag for a real estate investor
- Net operating income (NOI) – This number shows the income a property will generate minus the costs
- Return on investment – This shows the annual expected returns while taking into consideration all the expenses
- Capitalization rate – This metric shows the returns of the investment property without factoring in the financing strategy
- Cash on cash return – This shows the returns of a property on the basis of the cash invested
Related: The Ultimate Rental Property Analysis Calculator
5. Conduct Comparative Market Analysis
Once you have conducted investment property analysis to find the best positive cash flow investments, it is now time to ensure the price is right. The best way to do this is to carry out a comparative market analysis. All you need to do is find 2 or 3 buildings that are comparable to your investment property. Look for properties that have been sold not more than 6 months previously in the same neighborhood. This will help you avoid properties that are priced much higher than the real estate comps.
A Few Final Tips
Once you have identified the perfect real estate investment, the next step should be to carry out a home inspection to find out whether there is any renovation cost involved. You will also need to explore your options for rental property management.
A faster and less stressful way to find the best positive cash flow investments is to hire a real estate agent. This is especially important for out of state real estate investing. Since such agents are familiar with properties in the neighborhood, they can help you avoid the hassle of comparative market analysis and investment property analysis. However, don’t make the mistake of settling for the first agent you come across.
Finding a good real estate agent will involve checking the certifications and experience of candidates. The agent should have a good track record of finding property for real estate investors. Don’t forget to look for online and offline reviews about the agent.
Related: Working with a Real Estate Agent: What Investors Should Expect
Though hiring an agent will mean paying a fee or commission, it is a very effective strategy to find the best cash flow investments.
Anyone can get rich in real estate. However, it could take a substantial amount of effort and time to find the best positive cash flow investment in real estate. If you follow the steps above, you will eventually succeed in your search for the best cash flow investments.