Many people invest in real estate for cash flow. Cash flow investing is, in fact, seen as the best way to make money by the most successful investors as it enables them to realize a reliable stream of income and achieve financial independence. For this reason, they always try to find the best income producing assets wherever they can in order to reach their goal of building wealth.
If you’re new to the real estate investing world and wondering how to invest in real estate for cash flow, then this is the guide for you. Keep reading to find out what rental cash flow is and how you can go about real estate investing for cash flow.
What Is Cash Flow in Real Estate?
Cash flow in real estate is the difference between the monthly rental income of an investment property and its monthly expenses. If the property’s rental income is higher than its expenses, it is referred to as a positive cash flow property. This is the optimal case for a real estate investor as it means there will be money left as profit after paying all the property expenses. However, if the property’s expenses exceed the rental income, it is referred to as a negative cash flow property. In this case, the investor is losing money instead of making money.
Now that you have an idea of what cash flow is, let’s see how you can invest in real estate for cash flow.
Real Estate Investing for Cash Flow in 5 Steps
Step 1: Find a Top Rental Market
Location plays a huge role in how profitable rental property is. It determines the property’s price, rental income, rental expenses, and of course cash flow. Thus, when it comes to real estate investing for cash flow, the first step you should take is to do some research in order to find a profitable market for rental properties. But do not limit your search to your own city or state. It might be better for you to invest in real estate out of state, especially if your local market is not strong for real estate investments. So, be sure to research various markets regardless of their proximity to you.
In your search, don’t necessarily stick to hot real estate markets because of the higher rental income they generate. Don’t forget that these markets are associated with higher property prices, and so your rental income might not always be sufficient to cover the expensive property expenses. To be sure to find positive cash flow properties, you should look for a market with affordable home prices, as this will lower your mortgage payments – which also have a huge impact on real estate cash flow.
Other than affordable property prices, you should also look for a housing market with high rental demand. You want to find a location that attracts many tenants all year round, e.g. near universities (attracting students), workplaces (attracting graduates), or hot tourist spots (attracting tourists). This will ensure a high and consistent rental income. So make sure to find a real estate market that attracts at least one solid group of tenants.
Other factors that point to a profitable rental market include population growth, job growth, economic growth, and low property taxes. You must, therefore, carefully do your research in order to find a market that offers all these elements. To save you some time, we’ve put together a list of some of the best places for real estate investing for cash flow. You can check it out here: 10 Best Places to Invest in Real Estate in 2020.
Step 2: Identify the Best Neighborhood
After finding a top rental market, the next step in the process of real estate investing for cash flow is to find a neighborhood that offers the best investment opportunities. As you may know, not all neighborhoods within a city are the same. Property prices and rental income differ from neighborhood to neighborhood, and as a result, the rental property cash flow will also be different depending on the area. You, therefore, need to perform a neighborhood analysis in order to find the best neighborhood for cash flow real estate investing.
The best way to do so is to use Mashvisor’s Real Estate Heatmap. This is a tool that allows you to see how different neighborhoods within a city are performing according to the filter you set. You simply have to type in the name of your desired city and choose one of the following filters:
- Listing Price
- Rental Income (Traditional or Airbnb)
- Cash on Cash Return (Traditional or Airbnb)
- Airbnb Occupancy Rate
Then, the heatmap will highlight the neighborhoods that rank high in green and those that rank low in red. To locate the best neighborhood for cash flow investments, you have to identify an area on the map that has relatively low home prices and high rental income and occupancy rate.
Related: Finding Income Properties in 2020 with a Heatmap
Step 3: Start the Investment Property Search Process
Once you have located a good neighborhood for cash flow investments, you can move on to the third step: the rental property search. But before you can even start searching for rental properties, you should set your investment goals. First, you should decide on your budget. Based on your savings and sources of income, estimate how much you can afford to pay for a rental property without risking a default on your mortgage payments. Next, you should find out what type of real estate is the most sought after in the neighborhood you’re investing in. For instance, if we’re talking about a school district, then there will potentially be a high demand for single family homes. You should, in this case, target this type of real estate to ensure a positive cash flow investment.
Once you have set your investment goals, you can finally start searching for rental properties for sale. Here, you can use the Property Finder. It’s a tool that automatically finds investment properties for sale with a high return on investment based on your search criteria. All you have to do is set the following filters:
- Location
- Budget
- Rental Strategy (Traditional or Airbnb)
- Type of Real Estate
- Number of Bedrooms and Bathrooms
And then, the Property Finder will display a list of the best performing rental properties that match your filter selections.
Related: How to Use Mashvisor’s Investment Property Deal Finder
Step 4: Analyze the Rental Properties for Sale
Now that you’ve found a bunch of investment properties for sale, the next step is to analyze each one of them to identify the best positive cash flow property. This step in the process of real estate investing for cash flow is known as rental property analysis and allows investors to estimate how much return on investment they can expect to earn from each property.
To do this analysis efficiently, you need another important real estate investing tool: the Investment Property Cash Flow Calculator. With this tool, you can easily obtain all the numbers you need to assess the profitability of the properties you’ve found. They are actually readily calculated based on historical and predictive analytics. All you need to do is specify your financing method and enter your cash down payment. And then, Mashvisor’s calculator will automatically provide you with the following numbers for each rental property:
- Rental Income (Traditional and Airbnb)
- Rental Expenses (Traditional and Airbnb)
- Cash on Cash Return (Traditional and Airbnb)
- Cap Rate (Traditional and Airbnb)
- Occupancy Rate (Traditional and Airbnb)
- Cash Flow (Traditional and Airbnb)
You can then easily compare the different investment properties you’re interested in based on these numbers and ultimately decide which one is the best cash flowing real estate property.
On the other hand, if you only need to know the potential Airbnb rental income and occupancy rate of a specific property, you can use Mashvisor’s free Airbnb calculator instead.
Step 5: Perform Comparative Market Analysis
After finding a profitable rental property for sale, the last step is to make sure that the price you are going to pay for the property is reasonable. And to do this, you need to perform one more (and final) analysis: a Comparative Market Analysis (CMA). It involves finding 2 or 3 properties that are similar to the one you’re considering buying and that were sold in the past couple of months. In the world of real estate investing, these properties are known as real estate comps. The sale prices of the comparables will give you an idea of the fair market value of your target property.
Real estate comparables are very important when it comes to buying an investment property as they can help investors avoid overpaying for their rentals and ending up with negative cash flow. To find comparables, you can once again use Mashvisor. You simply have to click on the rental property you’re interested in and Mashvisor will show you all the comparables available in the area.
There you have it, real estate investing for cash flow in 5 steps. If you carefully follow these steps, then you should have no problem finding positive cash flow properties. Make sure to check out Mashvisor to get your hands on our real estate investment tools and start looking for the best cash flow investments in the US housing market. Sign up now to get started.