Looking for a way to make money in the US housing market as a real estate investor? Consider buying and owning a rental property. However, this does not mean that you should just settle for any property for sale. You need to find a cash flow positive rental property in order to start making money in real estate. If you end up with a negative cash flow investment, you will lose money instead of making a profit.
So, What Is Cash Flow Positive in Real Estate?
In simple terms, rental property cash flow is income minus rental property expenses. If a property’s income surpasses the expenses of buying, managing, and operating the investment property, then you have a positive real estate cash flow rental property. However, if the expenses of owning and running a property exceed the rental income, you will have negative cash flow.
Finding positive cash flow properties can be a great challenge, especially for first-time real estate investors. Some people even believe that cash flowing real estate doesn’t exist anymore! However, if you know how and where to look, positive cash flow rental property can be found everywhere.
How to Find Positive Cash Flow Properties for Investment
1. Choose a location
When it comes to finding cash flow positive real estate, location is very important. When conducting your real estate market research, look for areas that have a growing labor force, a strong economy, and a high demand for rental properties. In addition, you should look for an area with relatively affordable property prices. If the price to rent ratio is low, there is a higher chance of finding real estate cash flow positive property. Mashvisor has already put together a list of some of the best rental investment markets where you are sure to find cash flow positive properties. Check it out: 10 Best Places to Invest in Real Estate in 2020.
Once you choose a city, you need to find a good neighborhood for cash flow investing. You can use Mashvisor’s Heatmap Analysis Tool to look for neighborhoods with suitable investment properties for sale in your desired city. This tool allows you to narrow your search using filters such as listing price, rental income, cash on cash return, and Airbnb occupancy rate. For positive cash flowing neighborhoods, aim for areas that are green when the cash on cash return filter is set for the rental strategy (Airbnb or Traditional) of your choice.
Related: How to Identify the Best Places to Invest in Real Estate
2. Begin the investment property search process
Once you have found a potentially cash flow positive real estate market, it is time to begin your investment property search. Your offline search could involve looking for ‘For Sale By Owner’ (FSBO) signs in the area you are targeting. As you drive or walk around, also check for signs of distressed or abandoned homes. This could be an indication that someone might want to sell their property for below market value. Don’t forget to check local newspapers and magazines for home sale advertisements.
When searching online, start by visiting sites with property listings and real estate data such as Mashvisor. Mashvisor’s Rental Property Finder allows you to search in up to 5 cities at once. You can set filters like your budget, property type of choice, preferred rental strategy, and more. The tool then returns the highest cash flow properties in those markets within seconds.
However, before you begin the search process, make sure your budget is ready. Decide the maximum price you can pay in order to cover your mortgage payments and still end up with a cash flow positive rental property. All the properties you shortlist should fall within your price range. In addition, you should decide whether you want to buy a condo, multi family home, apartment or single family homes. Research which type makes for the best cash flow investment in the market of your choice. For example, in the Dallas real estate market, single family homes make for the best rental properties.
3. Conduct comparative market analysis (CMA)
After identifying a few cash flow positive properties that you would want to purchase, you need to carry out a comparative market analysis. This analysis will ensure that you pay a reasonable price for the house, can afford your mortgage payments, and thus have a positive cash flow. A CMA requires looking for several properties similar to what you are thinking of purchasing that were sold recently (real estate comps). The sale prices of those properties will give you an idea of the market value of the house you want to purchase.
For first-time investors, conducting a CMA could appear to be a daunting task. The process can drag on for a long time, thus delaying your investment in real estate. The good news is that you can use a rental property calculator that comes with readily available real estate comps. This will speed up the process and allow you to advance to the next step quicker.
Related: The Best Comparative Market Analysis Tools for Beginner Investors
4. Conduct investment property analysis
Besides performing a CMA, you should also conduct a rental property cash flow analysis to ensure you’re buying a cash flow positive rental. This analysis involves estimating what your running expenses will be, how much rent you should charge, and what cash flow is likely to be generated. Using Mashvisor’s rental property calculator will help you find out if you have a cash flow property on your hands within seconds using metrics such as occupancy rate, cap rate, cash on cash return, rental income, and ongoing costs.
5. Work with a real estate agent
If you don’t have experience in buying cash flow positive investment properties, it would be advisable to work with an experienced real estate agent. A buyer’s agent will come in handy during the negotiation process and can help you secure the lowest price possible. An agent can also help you run a CMA and cash flow analysis.
Related: A Guide for Finding the Best Real Estate Agents for Buying Houses for Rent Near Me
6. Set the right rental rate
The cash flow generated by your property will ultimately be determined by how you run the business. Once you have purchased the rental property, figure out how much rent you will charge for it. The rent should be high enough to cover your recurrent costs and mortgage while leaving a positive cash flow every month. However, the rent should not be too exorbitant that it scares potential tenants away.
The cash flow investment property analysis performed earlier will help you set a reasonable rental rate for your type of property and neighborhood. If you want to make more money, you can charge your tenants for extra services such as professional cleaning. Tenants would be more than happy to pay extra for a service that makes their lives easier.
When looking for a positive cash flow income property, take your time. Making rushed investment decisions can be very risky, especially if you’ve never done it before. Similarly, avoid getting emotional when looking for cash flow positive property. Don’t just buy a house because you feel emotionally attached to it. Finally, stick to your budget. Spending more than you can afford will only result in problems later.