Many beginner real estate investors ask: “How to find the best real estate investments?” or “How to invest in real estate?” In order to succeed in the real estate investing business, a real estate investor should understand what makes the best real estate investments. So, what are the factors that define the best real estate investments? Well, any successful real estate investor will tell you to invest in a positive cash flow investment property. Hence, you should avoid any type of property with a negative cash flow.
It is easy to say: “Invest in positive cash flow properties and skip negative cash flow investment properties.” But, how can you avoid buying investment property with a negative cash flow and what are the reasons for negative cash flow? Keep on reading to find out how the most successful real estate investors select a positive cash flow real estate investment property.
#1 What Is Cash Flow from Investing Activities?
Before proceeding with explaining how to avoid negative cash flow, let’s explain what cash flow from investing activities is. Basically, a cash flow is a movement of cash or cash-equivalents into or out of the pocket of a real estate investor. When buying investment property for rental purposes, a real estate investor may expect either the property will generate a positive cash flow or negative cash flow.
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What Is Negative Cash Flow?
So, what is negative cash flow? Well, negative cash flow appears when a real estate investor is losing money from a rental property. This means that the revenue you get from the investment cannot cover all the expenses/costs the property generates. When your costs are $1,000 and the revenue is only $800, you are $200 down each month. Consequently, this is a negative cash flow property or a negatively geared property.
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What Is Positive Cash Flow?
If you are wondering “What is positive cash flow?” make sure to learn more about the real estate investing business before buying investment property. Usually, a positive cash flow investment property is the one that generates enough revenue to cover all the costs and have some money leftover. If you plan on succeeding in real estate investing as well as becoming one of the most successful real estate investors, make sure to invest in a positive cash flow investment property. Additionally, a property generating positive cash flow is known as a positively geared property. Interested in having a deeper answer to the question “What is positive cash flow?” Make sure to read “Real Estate Investing 101: How to Find Positive Cash Flow Properties in the US Housing Market.”
#2 What Are the Reasons for Negative Cash Flow?
Knowing what is negative cash flow is not enough; beginner real estate investors must know how to invest for cash flow. In order to invest in a positively geared property, a house investor should know the reasons that a property generates a negative cash flow.
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Reasons for Negative Cash Flow: Wrong Rental Strategy
There is a chance you have a negative cash flow rental property because you have poorly chosen the rental strategy. For example, you decided to operate your property as an Airbnb property in a nice, quiet neighborhood, far away from the main tourist attractions, or in an industrial area, etc. This might be the reason for negative cash flow. Therefore, you should consider changing the strategy to a long term rental in order for your investment to become a positive cash flow rental property.
When considering dealing with rental properties, make sure you take various factors into account, such as location, for instance. Choosing a bad strategy and/or location may cause your investment to be a negatively geared property. Consequently, you may be in trouble with mortgage payments and be behind in your budget plan.
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Reasons for Negative Cash Flow: Rental Price
Many beginner real estate investors have difficulties in establishing rental prices. The majority of them desire to become rich and have a positively geared property with high return on investment rates. However, charging too much rent makes their property unattractive. Therefore, managing your property with low occupancy rates sooner or later brings you to negative cash flow. Nevertheless, asking for too little will increase the demand for a property, but after covering all costs you may end up with a negative cash flow real estate investment property.
The best way to avoid low occupancy rates is to study the market and to consult with the most successful real estate investors. Finding the right rental price would provide you with a stable demand for your property and stable income. Thus, your investment will be seen as a positive cash flow rental property.
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Reasons for Negative Cash Flow: Unnecessary Upkeep
You cannot expect your investment to be a positive cash flow rental property if you spend more than enough on things, such as furniture, renovations, or improving interior design. So: “How to invest in real estate?” Well, the revenue you get from the rent should be divided for profit and for the property maintenance.
It is a common mistake beginner real estate investors make with their first investments. In order to have a positive cash flow real estate investment property, many beginner investors spend too much on decorations as well as furniture to make their property look more attractive to potential tenants. However, investing too little can make your property look unattractive, which will result in negative cash flow as there would not be enough demand. Thus, you need to be careful with your investments and try to stick to a pre-established budget scheme.
#3 How to Avoid Buying Negative Cash Flow Investment Properties
In order to avoid dealing with negative cash flow investment properties, make sure to take a close look at these aspects:
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Finding a Profitable Investment Property
Investing in a profitable location will allow you to avoid managing a negatively geared property. So, how can you find a profitable location as well as a profitable investment property? The best answer you can get is to use Mashvisor’s rental property calculator. Mashvisor’s rental property calculator can provide you with a real estate market analysis and investment property analysis. You should use Mashvisor’s rental property calculator in order to avoid selecting a negative cash flow rental property with low return on investment rates.
Curious to learn how to invest in real estate, make sure to read “How to Invest in Real Estate in Your 20’s.”
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Select Only the Best Investment Strategy
To receive a positive cash flow from investing activities, you should select the optimal rental strategy for your investment property. Mashvisor’s investment property analysis calculator is able to provide you with that information. Mashvisor’s investment property calculator can suggest to a house investor which strategy best suits the investment property in question. Interested in learning more about rental strategies? Make sure to read “Airbnb vs. Renting Out the Traditional Way: Which Rental Strategy Is Better for You?”
To learn more about all aspects of a negative cash flow rental property, continue reading our blog.