Where to Find the Optimal Positive Cash Flow for Investment Property
Cash flow is the sum of money left over at the end of the day (i.e., your profit after repaying all expenses). While that might sound manageable enough, finding good cash flow property isn’t quite as simple as it might seem.
Some investment property can produce “negative” cash flow, which means you will need to contribute money out of your account every month. This could work if your strategy is to focus on capital gain. You will also need a strong finance to support the carrying cost and risk in the case of vacancy, job/income loss, or market downturn.
There are two chief ways that rental property investors make money:
- Cash flow left over after receiving tenant rent and paying expenses out of that rental income
- Appreciation in market value over the long term
Cash flow property is rental real estate that offers a higher level of cash returns than comparable property and normally a lower level of appreciation.
In a way, investing in cash flow property is comparable to owning dividend-paying stock. The higher the level of net cash flow you earn, the more money you will have to reinvest, and the quicker you will be able to pay off the mortgage and increase your real estate portfolio.
How to Ascertain and Analyze Cash Flow Property
1. Concentrate on cash flow real estate markets
The key attributes investors look for to find the best real estate markets for cash flow property are typical from the different economies not dependent on one major employer to steady population growth and the job market. Other qualities include robust demand for a rental property where the number of renter households is higher than owner-occupied households; affordable property prices since paying too much can decrease your net cash flow; dig down to the neighborhood level because cash flow can alter from one postal code to the next.
2. Value property depending on cash flow calculations
As you analyze each opening, you will notice that rental property with the highest cash flow generally has a lower rate of projected appreciation, frequently less than 2%. That’s one of the causes why cash flow property also goes by the name ‘cash cow.’ The property likely won’t see significant gains in market value, but it will throw off regular streams of cash that you can use to develop your capital for future investments. This is obviously mainly speaking on non-pandemic times.
3. Prepare a CMA to know rents and competition
A comparative market analysis (CMA) assists you in understanding the fair market rents, the tenants’ choices on where to rent or doing a competitor analysis, and what a fair price to pay for a property with steady cash flow is. The efficiency of a CMA depends on how well the comparable properties are selected. The analysis should be similar to the subject property acquired in the same neighborhood and with recent closing dates. Also, possible comps with significantly higher or lower sales prices than the subject property should be dismissed.
4. Apply a Pro-forma to itemize income and expenses
Once you have ascertained a fair purchase price for your cash flow property, create a Pro-forma P&L (profit and loss) statement to dig down on the income and expenses. Start by designing an individual line item for every income and expense. For instance, rather than using a single entry for “rental income,” break the income down into individual elements such as monthly rent, late charges, application fees, etc. Do the same thing on the expense page of your Pro-forma. Rather than having a single expense labeled “repairs & maintenance,” list each expense such as landscaping, lock modifications, and drain cleaning. It will take more time, but taking the time to feature each dollar coming in and out will assist you in unlocking the hidden value – and additional cash flow potential – of the property you are thinking about investing in.
5. Set fair market rents
You have to ensure—if you are purchasing a turnkey cash flow property already rented to a tenant—that the current rent being paid by the tenant is as per market rates. Hence, making it a point to ensure that the tenant is not paying too much rent, too little, but rather a fair market rent compared to other local properties. It’s also a good way to forecast what your future property cash flow will be.
6. Remember, good tenants are difficult to come by
Vacancy in your rental property can disrupt cash flow. Strong cash flow investors know that it’s better to keep a good tenant than run the uncertainty of trying to find another.
Make sure your property manager visits the property frequently, responds to maintenance problems quickly, and is always friendly and professional. Not presenting your tenants a reason to look around goes a long way toward reestablishing the lease year after year, even as annual rent rises are passed through.
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