Investing in rental properties is one of the most effective ways to generate consistent income. In fact, real estate investors who get their rental property cash flow analysis right stand to make a sizable return on investment. But what exactly is real estate cash flow? What is cash flow positive in real estate? And how to find positive cash flow properties? This blog will demystify the concept of cash flow in real estate and outline a simple guideline to finding cash flow positive rental properties.
What Is Cash Flow in Real Estate?
Cash flow is a basic concept in the world of investing. In simple terms, it is the amount of money that an asset generates after expenses are accounted for. In real estate, cash flow is the profit that you generate from your rental income after you have paid all the costs that come with operating a rental property. This invariably results in two situations: positive cash flow or negative cash flow.
So what does it mean when a property is cash flow positive? This occurs when the investment generates positive net income after rental property expenses are accounted for. Conversely, negative cash flow refers to any situation where income property cash flow is lower than the expenditure.
The Benefits of Cash Flow Positive Properties
Unless you are investing for appreciation, making money in real estate will depend on rental property cash flow. Here are the advantages of cash flow positive rental properties.
1- A cash flow positive rental property allows you to make other investments
The most obvious advantage of a cash flow positive rental property is that it allows you to put the cash surplus towards another investment. Scaling your real estate investment portfolio is by far the most effective way to increase revenue streams and steadily build your wealth.
2- It is a self-sustaining real estate investment
Another great thing about investing in cash flow positive properties is their self-sustaining nature. Unlike negative cash flow assets, these properties can cover their expenditures without requiring any capital injection from the real estate investor.
3- A cash flow investment property provides you with quick returns
One of the perks of investing for positive cash flow rather than appreciation is the quick returns that this real estate investment strategy generates. In fact, you can start seeing returns on your investment within a few months if you carry out a thorough investment property analysis and find a property that promises cash flow from the get-go.
4- Investing for positive cash flow is less risky
Investing in a positive cash flow rental property is inherently less risky than operating a negative cash flow one. For example, you will never find yourself in a situation where you are forced to sell the property just because something unexpected affected your income. On the other hand, a negative cash flow property can quickly turn into a money pit with the slightest drop in revenue.
Let’s now discuss some of the best practices you should adhere to when aiming for real estate cash flow positive.
How to Be Cash Flow Positive in Real Estate
Ensuring positive cash flow requires identifying the ideal rental property and avoiding several mistakes throughout the acquisition and management process. Here is how you should go about maintaining a cash flow positive rental property.
1- Get good investment property financing
Few things can undermine a property’s cash flow more than high interest rates. A costly loan can gradually sink your investment as your expenditure slowly snowballs throughout the repayment period. Needless to say, avoiding high rates is essential for guaranteeing long-term profitability.
2- Manage your rental property expenses
Operating a rental property comes with a host of expenses. If not managed properly, small recurring costs can end up affecting your bottom line over the long haul. Here are the main expenses that you need to keep in check:
- Utilities: Many real estate investors make the mistake of overspending on utilities. The right approach is to scour the market for competitive prices and to stick to the standard utilities that your tenant will need.
- Repairs: Damage to the property is inevitable when managing a rental. With that being said, you can anticipate these costs by setting aside reserve funds. The best way to do this is by saving at least one month of rental income during the year.
- Seasonal costs: Another mistake to avoid is not accounting for seasonal expenses. This includes everything from snow removal in the winter to lawn maintenance in the summer.
3- Implement incremental rental rate increases
Maintaining a cash flow positive property is in part predicated on knowing how and when to increase rent. It is important to note that property taxes and insurance premiums, among many other recurring expenses, are going up across the US. Naturally, your rental income needs to be high enough to cover them. To that end, make sure to include a rent escalation clause in the rental agreement.
Where to Find the Ideal Rental Properties to Invest In
An effective search strategy is your first step towards getting cash flow positive rental property. While there are many options that are available to you, few can match Mashvisor’s Property Finder. This advanced tool relies on cutting edge AI technology and features a set of highly accurate search filters. This makes finding the perfect investment property a quick and easy process. Moreover, you will be able to assess the profitability of a potential investment by accessing the investment property cash flow calculator for each listing. To learn more about the property finder as well as a host of other real estate investing tools, click here.
The Bottom Line
Regardless of your level of experience in the housing market, investing in a cash flow positive rental property will always be a highly recommended strategy. As long as you stick to the guidelines outlined in this article, you are guaranteed to see positive results.