Can You Really Find Cash Flowing Real Estate? Or Do You Have to Create Cash Flow?

For real estate investors, cash flow is the monthly income after paying all operating expenses and setting aside money for future repairs. But the question that many new investors ask is: Can you find cash flowing real estate in the 2021 US housing market market or do you have to create cash flow? The answer is: Yes, it is possible to find cash flowing real estate properties in today’s market, and this article will show you how.

Here’s why finding positive cash flow properties is important: You don’t want to be stuck with a negative cash flow property that takes money out of your personal account each month. Yet most expert investors would argue that cash flow isn’t the only thing you should consider when seeking out a profitable investment. You should consider the vacancy rate, cash on cash return, and real estate appreciation too.

Yes, it’s true, you shouldn’t just stick with cash flow when analyzing properties and, of course, a negative cash flowing property might not always stay that way, depending on the kind of strategies you use to bump up cash flow or a possibility for future appreciation. But relying on capital appreciation is almost like betting on the market.

Investing in real estate is about understanding the numbers. This article would compare these two perspectives – finding cash flowing real estate vs creating cash flow from any property. And then we’ll show you how to find cash flowing real estate investments using Mashvisor‘s real estate investment software.

Related: 5 Best Real Estate Investment Tools

Should you even consider buying a negative cash flow property?

A negative cash flow real estate investment costs more money each month than it earns. This implies that for a time you will have to assume the accrued expenses of the investment property from your own personal account. And let’s face it, not many people want to be in that position. That said, when you play your cards right, it might be very profitable in the long run. But, of course, this strategy is too risky, especially for beginners.

Related: Stop Using a Rental Property Cash Flow Spreadsheet

Pros and Cons of Finding Cash Flowing Real Estate

Pros

1. Positive cash flow properties provide you with a monthly stream of income from the start. You start profiting from your investment right away.
2. Positive cash flow real estate investing protects you from future interest rate hikes. Even if interest rates rise and your mortgage payment increases substantially, cash flow investments offset some of that burden and keep you afloat.
3. Unlike negative gearing, with cash flowing real estate, you don’t need an increase in the value of your property to make bank.
4. It makes you more attractive to lenders. Positive cash flow properties make you more liable to receive loans from lenders.
5. You can make money even in a market downturn. Your income doesn’t depend on market fluctuations, and you continue to earn despite the state of the local real estate market.

Related: Real Estate Investing for Beginners: How Much Cash Flow Is Good for Rental Property?

Cons

1. Profits generated from positive cash flow properties are taxable. Since you are actually earning income, unlike with negative cash flow, you will have to pay taxes.
2. Positive cash flow properties for sale are often located in economically volatile areas. Prices do not remain stable for long, and this can negatively affect your investment.
3. When you buy cash flow positive properties in low income areas, you often have to deal with high maintenance costs and tenancy problems.

Pros and Cons of Creating Cash Flow

Pros

1. There is a high potential for capital growth. Losses incurred could be offset by capital gainس.
2. Negative cash flow properties incur less taxes.
3. Properties are much less volatile, compared to cash flowing real estate.
4. Your options are greatly increased when you are not limiting your investment property search to cash flow positive properties only. This increase in options affords you the chance to purchase properties in much safer neighborhoods.

Cons

1.  Negatively geared real estate generally requires more sweat equity to produce investment returns.
2. You’re reliant on capital gains. You only make money when the rental market goes up. When the market is stable or in a downturn, you lose.
3. It is a long term strategy that only pays off with a lot of patience and due diligence – not recommended for new real estate investors.

How to Find Positive Cash Flow Properties with Mashvisor

1. Add up possible maintenance, mortgage, insurance, and repairs

Allocate a certain proportion of rent for maintenance and taxes when evaluating real estate profitability. Your cash flow projections are only as good as your assumptions about your expenses. Realistic estimates are the hallmark of a good investor. 

Using Mashvisor’s investment property calculator, you can specify the amount of down payment on your mortgage, loan amount, interest rate, and loan type. Our software tools provide you with estimates of both one-off expenses and recurring expenses as well as the expected rental income. These are based on rental comps from the area and our own machine-learning algorithms. However, all these estimates are customizable, so you can change them if you think you might be able to achieve different values. Then, our real estate investment calculator will give you your rental property cash flow estimate.

2. Look for a large gap between rent and mortgage

A property with a large margin between expected rental income and mortgage payment will yield a monthly net positive cash flow. A basic rule for maintaining positive cash flow is reducing expenses. When your mortgage is 3x your rent, cash flow bears the brunt.

Whatever the kind or amount of financing you’re working with as an investor, you’ll find Mashvisor’s real estate heatmap a useful tool for conducting neighborhood analysis to find areas where rental income is relatively high, and property prices are relatively low.

After you’ve selected an area, Mashvisor’s Property Marketplace will be helpful for finding cash flowing real estate.

You can find off market listings by filtering your search based on location, property type (single family, multifamily, or condos), budget, number of bedrooms and bathrooms, and rental strategy (Airbnb or long term rental). 

3. Use the 2% rule and the 50% rule

Many investors use these rules as a quick and fast way to evaluate deals. The 2% rule basically says that any property that rents for 2% or more of its purchase price is usually a good deal. It’s a quick way to determine the profitability of a property. But since price is only one piece of the puzzle, you shouldn’t rely on the 2% rule alone when deciding to invest in a particular income property. 

The 50% rule complements the 2% rule. It states that property expenses will represent 50% of gross income. It is worth noting that, like the 2% rule, this rule only helps to arrive at an estimate. It is not completely foolproof. However, it is a valuable tool in deal analysis.

To apply the 50% rule, start with your gross income. Then subtract 50% of revenue to cover property expenses. The result is the net operating income (NOI) of your investment property. Deduct your mortgage payment to get your monthly cash flow.

For example, if you bought a property listed for sale at $175k and had to pay a 25% down payment for a 30-year fixed rate mortgage (at an APR of 3.5%), you’ll be paying ~$1,000 in mortgage monthly. If the current monthly rent is $2,000, here’s how to calculate cash flow using both the 2% rule and the 50% rule.

We already determined, using the 2% rule, that this property is not cash flowing as it rents for less than $3,500 (0.02 * $175,000). But we can’t rely on this estimate alone.

To determine cash flow using the 50% rule:

• Mortgage = ~$1,000
• Annual gross income estimate = $2,000 * 12 = $24,000
• Estimated expenses (according to the 50% rule) = $12,000 annually or $1,000 monthly
• Monthly cash flow = Rent ($2,000) – expenses ($1,000) – mortgage ($1,000) = 0

If this property could rent for $2,500, we have:

• Annual gross income estimate = $30,000
• Estimated expenses = $1,250
• Cash flow = $250 monthly

So, this investment property has the potential to generate positive monthly cash flow of $250.

Related: How to Do Investment Property Analysis

Conclusion

Buying positive cash flow income properties for sale means money in the bank every month, but negative cash flow can result in better ROI in the long run at the risk of losing money in the short term. 

So should you hunt for cash flowing real estate or create cash flow? It all depends on your goals, finances, and risk tolerance. But whether you’re a novice investor looking to make your first real estate investment or a seasoned investor, Mashvisor’s real estate cash flow calculator can help you make faster and better decisions. Sign up now.