With every real estate investment, there must be a good return on investment (ROI) and fast cash flow returns to deem any rental property profitable. Investing in real estate is the ideal safe investment with steady returns and long-term real estate appreciation. Buying a rental property reaps real estate investors passive income (rental income), directly proportional to the location and the macro-economic conditions. If the economy is in upswing, the housing market will also experience positive repercussions and vise versa.
Before real estate investors hone in on a rental property, they study the macro market conditions, the economy, the real estate market, and then the rental property itself. Without grasping and understanding real-time macro and micro conditions, real estate investors can never guarantee profitable and positive cash flow properties to build wealth in real estate.
Before we delve into how to find positive cash flow properties, we must understand what it really means and its importance in real estate.
What Does a Positive Cash Flow Property Reap?
To put it in the simplest terms, real estate investors capitalize on rental properties for positive cash flow to acquire:
- A positive net profit
- Cash surplus
- Cash returns which exceed fixed costs and operating expenses
Related: All You Need to Know About Researching Rental Properties
A Positive Cash Flow Property Hypothetical Example:
A real estate investor buys a rental property for a total price of $500,000. He takes a loan of $300,000 at 5% interest.
He decides to rent the property for $600/week and incurs the following expenses:
- Mortgage: $288.46 ($300,000 x 0.05 /52)
- Property management fees: $42.00 (7% of rental income)
- Landlord’s insurance: $13.46 ($700/year)
- Repairs and maintenance: $30.00 (5% of rental income)
Total expenses = $391.92/week
Therefore, the real estate investor would be earning a surplus of cash, or a positive cash flow return, of $208.08/week after his expenses. The positive cash flow property would have accumulated $10,820.16 in extra income at the end of the year.
5 Reasons Why Positive Cash Flow Is a Must for Income Properties
1. It generates passive income for real estate investors/landlords
This goes without saying! Buying a rental property, whether in the traditional sense or for a short-term rental strategy like Airbnb, must give real estate investors high returns and cash surplus. To be profitable in real estate, rental income must exceed total expenses and generate excess cash returns, as shown in the example above. Essentially, your rental property pays you cash, gives you extra income, and acts as a financial cushion for many years to come. This is exactly why so many people gravitate towards starting a real estate business; it is a safe investment with a good ROI.
2. Rental income increases over time
When real estate investors buy positive cash flow properties, their rental income essentially increases over time simply because as your rental income incrementally increases, your major expenses (i.e., mortgage payments) stay relatively the same. So, long story short, the higher the rental income, the more cash flow returns investors earn per month. Not only do your tenants pay down your mortgage payments, but also you increase the equity of the rental property down the line to give you more leverage. More on that in the next point.
3. Real estate investors leverage their equity to buy more rental properties
If you buy a rental property with a mortgage loan, essentially you accumulate equity of owning the real estate property down the line. This means that as you build your equity and gain full ownership of the rental property, you gain leverage to use this equity against buying more real estate to build your real estate business and diversify your portfolio.
4. A positive cash flow property is a safer investment than a negative gearing strategy
A positive cash flow property makes money in two ways: rental income and appreciation. Meanwhile, a negative gearing property does not make money from rental income. On the contrary, negative geared properties occur when the cost of owning a property exceeds the income it generates each year. These properties make money when they are sold for a lump sum.
5. Building a real estate business provides financial freedom
Real estate investing paves the way for building wealth and long-term financial security. Given the right location and suitable economic conditions, real estate investors can find positive cash flow opportunities to build wealth and generate significant passive income on a monthly basis. It goes without saying that real estate investing will always be in demand, and it will never go out of style. But with all this said, make sure you choose the right housing market and the right rental property for reaping big profits and building your real estate business.
Related: How to Deal with Negative Cash Flow Properties
How to Find a Positive Cash Flow Property
Real estate market analysis (macro) and investment property analysis (micro)
Without the right real estate analysis and due diligence, investors cannot deduce if a rental property will be profitable and reap positive cash returns down the line. To make smart decisions in real estate, investors use financial metrics (cap rate, cash on cash return, etc.) and tools (like Mashvisor’s Airbnb calculator) to estimate ROI and pocket big profits.
Mashvisor’s investment property calculator
The rental property calculator helps investors calculate the ROI, taking into account fixed and operating costs.
Key calculations of the investment property calculator include:
- Cash on cash (CoC) return: The cash on cash return equals the net operating income (NOI) over the total cash investment. A good benchmark to keep in mind is at least 8% of CoC return to insure good profitability.
- Capitalization rate: The cap rate is the ratio of the net operating income over the real estate property value.
- Positive/negative cash flow: The cash flow estimates cash returns, whether positive or negative.
Related: How to Calculate Return on Investment for the Most Profitable Real Estate Investments
Conclusion
Successful real estate investing is about capitalizing on positive cash flow properties to earn fast cash and long-term real estate appreciation. If you are a first-time investor, seek professional advice from a real estate agent or a real estate broker. Find the best methods to conduct real estate market analysis and investment property analysis. Find the best tools to measure financial metrics and estimate cash returns and overall net profits on any real estate investment. Understanding how to estimate the ROI on a rental property is key to guaranteeing long-term profits and building a successful business in real estate.
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