How to Perform Real Estate Investment Analysis for Buying Positive Cash Flow Income Properties

Unless you are extremely lucky, buying positive cash flow income properties with a high return on investment is the result of diligent and detailed real estate investment analysis. However, if you are still a beginner investor, you might not be familiar with all the steps of researching and analyzing housing markets and investment properties for sale. To help you get started in real estate investing and make money from traditional or Airbnb rental properties in 2020 and beyond, we will show you how to analyze real estate markets, neighborhoods, and individual income properties for making profitable investment decisions each and every time.

Why Should You Invest in Positive Cash Flow Income Properties?

First things first… Are you wondering why it is so important to buy a rental property with a positive cash flow? Or to go back even further, do you know what cash flow is in real estate investments and how to calculate it? Let’s have a look at this important concept in the real estate business.

What Is Cash Flow in Real Estate Investing?

Understanding cash flow is relatively easy. This is the difference between your rental income – whether you buy a traditional or an Airbnb investment property – and the recurring expenses associated with owning, managing, and renting out an income property. The latter is commonly referred to as the monthly rental expenses. These costs include property tax, property insurance, rental income tax, property management, property maintenance, HOA fees (if buying a condo), utilities, and cleaning fees (if you invest in Airbnb) as well as the mortgage payment if you take a loan. Indeed, the mortgage repayment is usually the largest monthly cost. Both the rental income and the rental expenses vary significantly depending on the location of an investment property, the property type and size, the rental strategy (traditional vs. Airbnb), and the rental property management style.

How to Calculate Cash Flow

Based on the definition above, here is how to calculate this real estate investment metric:

Cash Flow Formula

Cash Flow = Rental Income – Rental Expenses

Investing in Positive Cash Flow Income Properties vs. Negative Cash Flow Properties

Being the difference between how much you get from your traditional or Airbnb rental property and how much you spend on it, cash flow measures how much money you make as a real estate investor. If the rental income exceeds the rental expenses, you have positive cash flow properties. In this case, you are actually making money from real estate investing.

In the opposite scenario, if the recurring costs are higher than the monthly income from an investment property, you have a negative cash flow income property. This is something which no real estate investor even wants. This situation signifies that you are losing money from your rental property as a result of poor location choice (with weak rental demand), sub-optimal property management, or any other reason.

How to Conduct Real Estate Investment Analysis for Investing in Positive Cash Flow Properties

The process of finding a positive cash flow income property is comprised of conducting 3 types of real estate analysis, described in detail below:

1. Real Estate Market Analysis

Not all locations are created equal for real estate investing. Some markets offer better investment opportunities than others. The US housing market in which an income property is placed determines how much you can charge for rent as well as whether renting out on a long term or a short term basis will generate a higher rental income. At the same time, it also affects mortgage interest rates, property taxes, insurance rates, property management fees, and all other costs associated with owning and running a rental property. That’s why location is a major determinant of whether a real estate investor will end up with positive cash flow income properties or negative ones.

So the question becomes: “How do you conduct real estate market analysis to assure buying a positive cash flow property?”

While it is impossible to generalize if a US housing market will provide you with a difference between the rental income and the rental expenses above or below zero, there are some factors which are good indicators.

For example, if you are thinking of investing in traditional rental properties for sale, look for a location with a low to moderate price to rent ratio. For those of you who are new to real estate investing, a low price to rent ratio is 15 or below, while a moderate price to rent ratio ranges between 16 and 20. Such a value means that rental rates are high compared to property prices – and consequently, to mortgage payments. As already mentioned above, loan repayments constitute a sizeable part of recurring expenses when investing with a mortgage. As property taxes and property insurance rates are a percentage of the property price too, they are also small in comparison with the rental income in these real estate markets. So, locations with a price to rent of up to 20 are most likely to be home to positive cash flow income properties.

On the other hand, if you’d like to b income properties rather than traditional rentals, there are other factors that you should focus on. One of the most important indicators in your search for positive cash flow properties to rent out on a short term basis is the Airbnb occupancy rate as well as the average Airbnb daily rates, of course. Airbnb income is the product of how many days a month you can rent your property out for and how much you charge per night. Real estate markets with a high demand for short term rentals enjoy excellent Airbnb occupancy rate, which is turn translates into good Airbnb rental income. In your real estate market analysis, it is also important to focus on locations with reasonable median property prices. First of all, this will keep your recurring expenses down, through the same mechanisms which we discussed in the section above on investing in long term rental properties. Second, buying an investment property within his/her budget is crucial for the success of a beginner real estate investor as it lowers the risk of defaulting on the mortgage payments and ending up in a foreclosure. In conclusion, for investing in vacation home rentals, focus on markets with high Airbnb occupancy rates to buy positive cash flow income properties.

2. Neighborhood Analysis

The next step in the real estate investment analysis required for investing in positive cash flow properties is conducting neighborhood analysis. In real estate investing, location is not limited to the city or town only but encompasses the specific neighborhood within a real estate market as well. At the neighborhood level, it is important to focus on a few factors including the median property price, traditional and Airbnb income, and traditional and Airbnb occupancy rate.

If you are thinking of investing in such a large city as the New York real estate market, the Los Angeles real estate market, the Chicago real estate market, or the Houston real estate market, finding, collecting, and analyzing all the necessary real estate data for buying positive cash flow income properties will take weeks or even months. By the time you’ve identified a couple of profitable areas for investing in your preferred rental strategy – traditional vs. Airbnb – all top-performing investment properties for sale will be gone. In such a competitive industry as real estate, it is crucially important to be quick and efficient.

However, in 2020 real estate neighborhood analysis does not have to take months. It can be done within a few minutes with the help of real estate investment software tools like those offered by Mashvisor. Being one of the top AI real estate investment tools, Mashvisor provides beginner real estate investors with all the required real estate data analysis to locate profitable neighborhood in just about any US housing market, no matter how big or small.

A good place to start is Mashvisor’s heatmap which shows a color-coded neighborhood map of any US real estate market. In order to find positive cash flow rental properties, you should focus your research on:

• Listing price
• Traditional or Airbnb rental income
• Airbnb occupancy rate

What we’ve discussed above about cities holds true about neighborhoods as well. The lower the property price and the higher the rental income that you can generate as a landlord or an Airbnb host, the higher your chances of being the proud owner of a positive cash flow property.

Once you’ve identified a few neighborhoods which match these criteria, it is time to make use of Mashvisor’s investment property calculator.

The real estate investment analysis summary which you will find on Mashvisor’s neighborhood pages includes:

• Median property price (one of the most important factors for identifying whether buying a positive cash flow property is easy or hard)
• Average price per square foot
• Average traditional cash on cash return
• Average Airbnb cash on cash return
• Average traditional rental income (another important indicator for whether you will end up with positive or negative cash flow properties if renting out on a long term basis)
• Average Airbnb rental income (same as above but if you rent out on a short term basis)
• Number of investment properties for sale (investing in a market with numerous property listings helps first-time real estate investors avoid tough competition)
• Number of Airbnb rental listings
• Number of traditional rental listings
• Average Airbnb occupancy rate
• Optimal rental strategy (which optimizes the likelihood of investing in positive cash flow income properties in this neighborhood)

The Comps tab gives real estate investors access to real estate comps in the neighborhood, which eliminates the need to conduct the tiresome and boring comparative market analysis (CMA) manually. CMA is an essential part of the real estate investment analysis necessary for investing in positive cash flow income properties. Knowing for how much comparable properties have been selling in the area within the past few weeks helps investors determine the fair market value for the property type that they are planning to buy. Assuring that you pay the right price for rental properties for sale is a must in order to minimize your monthly mortgage payments and optimize your cash flow.

The Insights tab on the neighborhood analysis page is particularly useful for investors interested in buying positive cash flow properties. This part of the analysis shows you not only the optimal rental strategy for making the maximum amount of money as a real estate investor in this area but also the optimal property type (single family home, condo, townhouse, apartment, multi family home, etc.) and the optimal number of bedrooms. Focusing on rental properties for sale which match these criteria during your property search increases your chances of ending up with a positive cash flow income property.

3. Investment Property Analysis

The last stage of the real estate investment analysis that you need to conduct in order to buy positive cash flow properties entails performing rental property analysis. After all, while some locations are more likely to host profitable, money-making investment properties, you can find positive cash flow income investments – as well as negative ones – in any single US housing market. That’s why it is absolutely required to analyze in detail any property which matches your budget, expected rental income, and needed return on investment (in the form of both cash on cash return and cap rate) in order to secure positive cash flow as well.

Once again, even if you are a new real estate investor, you don’t have to worry about traditional and Airbnb data collection and computation when conducting investment property analysis. Mashvisor’s rental property calculator provides you with readily available estimates of the traditional and Airbnb rental income as well as a detailed breakdown of all recurring monthly expenses, customized for your selected location.

All you have to do is to check whether the cash flow number is below or above zero. Moreover, this real estate investment software tool gives you the opportunity to turn any initially negative cash flow investment property into a positive one by adjusting the rental income and/or the rental expenses. However, you should only do this if you have strong reasons to believe that you can outperform the local rental market.

 

 

To take your real estate investment analysis to the next level, the Rental Comps & Insights tab gives you access to both traditional rental comps and Airbnb rental comps in the neighborhood. This allows you to have a look at the income properties similar to the one that you are planning to buy. That’s what our real estate investment app has used to calculate the expected rental income of your future investment property. For traditional listings, you can see what monthly rental income properties in your area have been able to generate recently, based on how similar and close to your investment property they are. Similarly, for Airbnb listings, you can see the Airbnb occupancy rate, the daily rates, and Airbnb income of neighboring short term rentals and compare them to the one that you consider investing in. Knowing how the estimated rental income has been calculated is important for enhancing yours as a landlord or an Airbnb host to assure buying positive cash flow properties.

While buying positive cash flow income properties requires meticulous real estate investment analysis at a few different levels, it is absolutely doable with the software tools which 2020 has to offer to both beginner and experienced investors. All that’s left for you to start making money with traditional or Airbnb investment opportunities is to sign up for Mashvisor today and choose the rental property best for you from hundreds of thousands of listings all across the US.