Like all types of investing, real estate requires that you develop expertise with some basic metrics, such as rates of return and cash flow. Calculating and understanding these metrics correctly will help investors increase their rate of success. The cash flow that their rental property generates should be suitable to meet their financial needs. That is why it is important that we discuss in detail, what every real estate investor needs to know about cash flow.
What every real estate investor needs to know about cash flow
What is cash flow?
Money comes in, money goes out. That’s as basic as it gets! Cash flow is the money moving in and out of your business every month. As a real estate investor, having a positive cash flow should be your number one goal. If you look at a particular period of time , you’ll want to see more cash coming in than going out. If you made more money than you spent, then you have “positive cash flow” for the year.
Another term you will sometimes see for positive cash flow is “net spendable cash,” which refers to the cash flow that is left over after you pay your income taxes on the property’s earnings. If a real estate investment has a positive cash flow, then that is money you can take off the table. On the contrary, if you have spent more than you took in, you had a “negative cash flow”. This is definitely something you as investor want to avoid.
Related: How to Find Positive Cash Flow Properties
How do you increase cash flow?
First things first, if you want cash flow, then you have to know how to earn it! What every real estate investor needs to know about cash flow is how to increase it. Here are suggestions to increase your cash flow on a rental property:
1. Increase the rent
If your tenants are paying under market rents, then you might want to consider raising their rents. If the property is in an area with rent control or the rent has already been increased recently, then this might not be an option for you. Always keep in mind that a large increase might cause your tenants to move out, so you want to keep the increase reasonable.
2. Pay less for a property
One condition that is put on every offer is that, “the deal is subject to property inspection”. This means the vendor has to give you access to the property within a reasonable amount of time to complete an inspection. What that inspection reveals can be used as an advantage to reduce the purchase price. Basically, if the inspector comes back and tells you that the roof needs replacing or that the wiring is outdated, you can go back to the vendor and ask for a price reduction because of the work you are going to have to do. Sometimes the vendor will offer to get the work done, but your preference should ALWAYS be to get it done yourself. As long as there aren’t any deal-breakers, then you can use it to reduce the purchase price.
3. Larger down payment
This is not an easy decision to make for investors, but one of the options to boost your cash flow is to increase the amount of money you put down because it reduces your financing costs. High ratio mortgages also have a lot of added fees associated with them, so getting out of that category saves a lot of money each month.
4. Buy more rental properties
Basically, the more properties you have, the higher the potential for cash flow. Save your cash flow to buy more properties. Many people prefer to use their cash flow to pay the mortgage off but buying more rental properties can benefit you a lot in the future. Buy homes below the market value to get great cash flow and instant equity.
Related: Buying a Rental Property: Should You Go For One Expensive or Two Cheap Properties?
5. Stable tenants
Single family homes are the best since they promote stable tenants who tend to think of the property as their own homes and take better care of them than apartments. Research show that tenants will also stay in a single family home longer than in an apartment. The less turnover and vacancies you have, the higher the cash flow you will receive. If you have to rent a property every year or so, and you have a vacant month every year, your cash flow will surely suffer.
Now that you are familiar with ways on how to increase your cash flow, it is important that you understand your cash flow numbers correctly. What every real estate investor needs to know about cash flow is how to calculate it! Calculating cash flow from an investment in rental property will tell you whether your investment makes economic sense and will help you decide whether the investment is a good one. Here is how to do it:
- Calculate taxable income or loss from the property. Taxable income or loss is rent received minus three types of expenses: operating expense, depreciation, and mortgage interest expense. Basically, your income – expenses = cash flow.
- Tracking your likely payments is the most difficult part of calculating the expected cash flow from your rental property. Predicting expenses is a big part of owning a rental property, as there are many potential costs that could lead to additional payments when something breaks, burns, gets torn down, or otherwise damaged or someone is injured. Tracking your recurring payments by grouping them together will help you determine the minimum amount of money to put away as maintenance provisions.
To help investors in the calculating process, a rental property calculator would be a very useful tool. A rental property calculator will help you determine your monthly cash flow based on your payments and rent and will provide for you the numbers you need to determine whether you not you property is making enough cash flow. Mashvisor’s rental property calculator will help you better understand your cash flow.
Related: Where can you find a rental property calculator?
What every real estate investor needs to know about cash flow properties is where to find them! There are many tricks to follow to target positive cash flow properties when starting your search.
- Identify what type of property you want (residential house, commercial or even industrial)
- Look for areas that offer higher rental returns
- Look in high yield suburbs
- Buy properties 20 – 40% below the median price for the suburb
- Look for properties with a little twist. Maybe be house that can be divided into flats
Related: 5 Ways To Create A Positive Cash Flow Income Property
The list of strategies on finding positive cash flow properties can go on and on. What’s important to keep in mind is to always research and study a property before making any decisions. Cash flow is extremely important when investing in long-term rental properties. Ease of management, expenses, turnover, and vacancies must be considered when figuring true income. Where you buy, what type of properties and how you manage your expenses will greatly affect your cash flow.
Use Mashvisor’s predictive analytics to determine if a property will have positive cash flow.