If you want to know how to make money from real estate, then get acquainted with the term cash flow. What is it? And how to invest for cash flow in real estate? Learn all the answers here!
Cash flow is an essential aspect of real estate investing. Therefore, success in the field requires that a real estate investor knows how to spot the best cash flow investments. The most successful real estate investors have one thing in common: they are always able to spot the cash generating opportunities, and that’s what you need to learn as well. But, before we get into how to invest for cash flow, let’s get an in-depth view of the term ‘cash flow’ itself:
Related: The Many Roads of Real Estate Investing
How to invest for cash flow: What is cash flow in real estate?
A cash flow is essentially a stream of income that the property generates on a regular and ongoing basis. Of course, that is after you deduct any expenses associated with the assets that generate cash flow.
There are a few ways through which a property produces cash flow from investing activities. The most common forms are rent, facility fees, tenant application fees in addition to any other various fees.
How to invest for cash flow: How to calculate the cash flow for an investment property
To calculate the cash flow, you will only have to subtract the monthly rental expenses from the monthly rental income. The cash flow formula should look like this:
Monthly rental income – Monthly rental expenses = Monthly cash flow
So far it looks easy, huh? Do not get fooled yet. It is simple, however, it is not that easy. Calculating the rental income is very easy as you receive a certain amount of rent each month. Moreover, if you want to calculate the annual rental income, all you have to do is to multiply the monthly rental income by 12. However, the problem, and where most new investors mess up, is with the property expenses.
Property expenses are never stable. Some expenses occur on a regular basis while others occur less frequently. In some cases, they never occur in the first place. What’s more important is that there are unforeseen expenses that you must be aware of.
Here is a list of rental expenses that affect your cash flow:
- Monthly mortgage payments.
- Property insurance (unexpected damages or natural disasters).
- Property taxes (not taking into account any tax deductions).
- Water and sewer.
- Gas/ Electricity.
- Maintenance.
- Marketing and advertising.
- Vacancies (Yes, they also cost money!).
- Professional property management.
Of course, these are not the only rental expenses you should take into account. Some of them might not even be necessary at all. For instance, if you get flood insurance for the rental property and there have never been floods in your area, it will eat up your cash flow causing it to decline.
How to invest for cash flow: Return on investment and cash flow in real estate investing
One term that a real estate investor must understand is the return on investment. In real estate investing, it is a significant profitability measure for an investment property. It deals with the amount of money invested and the income that is produced by the subject property. This makes it a very important figure to deal with while performing the investment property analysis.
In order to calculate the return on investment (ROI), you divide the annual net profit by the net asset worth. Here is an example:
Your investment property produces $80,000 in net profit each year while you have purchased it for $240,000 (net asset worth). To figure out the rate of return, you divide $80,000/ $240,000 which equals 0.33 or 33% (which, by the way, means that you’ve got your hands on high cash flow investments).
By now, you are wondering what does the cash flow have to do with all that? Well, the net profit in the return on investment formula is actually the annual cash flow that a property produces. The simplest way to calculate the annual cash flow is to multiply the monthly cash flow by 12. But one thing to consider is that, like we said before, the monthly cash flow is never stable as there are expected and unexpected expenses in the middle. Therefore, the best way to accurately calculate it is to add it up instead of multiplying. Moreover, make sure your figures are as accurate as possible.
For the best ROI, you want to make sure your property is generating a positive cash flow. After all, a positive cash flow means that you are investing in good cash flow investments. Otherwise, a negative cash flow would mean that your property is underperforming and you need to do something about it.
How to invest for cash flow: What are the best real estate investment strategies for cash flow?
There is a variety of investment strategies in real estate, but not all of them are suitable for cash flow investing. The fix and flip strategy, for instance, is a very lucrative investment strategy. However, it relies on forced appreciation (capital profit) rather than cash flow. Therefore, the best properties that generate cash flow are rental properties.
Investing in rental properties has been the ultimate investment strategy for many real estate investors. For beginners, in particular, it’s been the safest. Thus, there are two options that you could go with when investing in rental properties:
- Traditional rentals: This type of rental strategy makes for some of the best real estate investments for cash flow. The main characteristic of it is the long-term leases that vary from several months to several years. The best part of it is the steady cash flow for extended periods of time. This also saves you on marketing expenses to find new tenants.
Related: This Is How to Become the Most Successful House Investor in Town
- Airbnb rentals: Ever since Airbnb launched, the travel business has drastically changed. Airbnb provides short-term leases for travelers and vacationers. Similar to the concept of hotels, the only difference is that travelers get to rent a private property, be it a room or an entire house.
Airbnb has been the optimal rental strategy for so many investors as it requires as little as having a vacant room in your house that you are willing to rent out. Moreover, Airbnb rentals are, literally, the best cash properties in real estate. They have helped many real estate investors to repay their property mortgage as well as make some extra money on the side. Airbnb allows you to have several Airbnb guests coming in and out of your property each year or even month.
If you wish to learn more about making money with Airbnb rentals, we suggest you read the following blogs:
How Can You Sustain High Airbnb Occupancy Rate for the Most Profitable Rental Property?
When is Renting Out a Room on Airbnb the Ultimate Real Estate Investment Strategy?
How to invest for cash flow: How do you create positive cash flow?
There are a few ways a real estate investor can create or even increase their cash flow. So, here are some tips on how to invest for cash flow:
How to invest for cash flow: Review your investing portfolio
If you want to know how to invest for cash flow, then start with yourself first. One thing you can do to increase your cash flow is to analyze your existing investing portfolio. Take a look at your investment properties and check the following:
- Any services that you can add and charge for, such as cleaning services.
- How often do you visit the property to inspect it? Do you need to do so more frequently?
- How frequently do you maintain the property? Remember, if you do it today, you won’t have to worry about it tomorrow.
- Consult with other successful real estate investors who have made the best real estate investments throughout their career. See what advice they have to offer you about your investing portfolio.
How to invest for cash flow: Grow your business
One way for how to invest for cash flow is to actually grow your business. By this, we mean that you should purchase more rental properties and expand your portfolio. However, we only suggest you do that if you have the financial means to do so. More rental properties definitely mean more cash flow.
How to invest for cash flow: Create more renting units
Another popular way amongst real estate investors is to create more units from one rental property. However, this does not mean that you can do that with all types of properties. But, there are properties that have the potential to divide them. If you manage to create two renting units from one property, obviously, you will receive more rental income each month and eventually more cash flow.
How to invest for cash flow: Change your rental strategy
Sometimes, your problem is not with the property, but with the rental strategy itself. If you are investing in Airbnb rentals in a city that does not have much going on with tourism, then we do not think that it will be generating any positive cash flow. In fact, it might cause negative cash flow which is a No No in real estate.
How to invest for cash flow: What causes the cash flow to decline?
Bad tenants
For a landlord, bad tenants are certainly a pain. The last thing you want is a tenant who is constantly complaining or even breaking items around the property. Therefore, be it you or your property manager, you have the right to run a background check on your tenants. Make sure they have a good credit score and a good rental history. So, if you want to know how to invest for cash flow, make sure you avoid bad tenants by checking them thoroughly.
Vacancies
When investing in rental properties, keeping your property occupied must be your number one priority. A vacant property means that you still have to make mortgage payments, taxes and maintenance fees. Thus, we do not think that is possible without the rental income unless you want to pay from your own pocket and end up with negative cash flow. However, to avoid this, we would suggest one of two options:
First, make your investment property as desirable as possible. Moreover, focus on the right marketing strategy.
Second, you can choose to invest in long-term rentals. This limits the vacancy rates of your property. It makes sure that you are receiving a rental income and having a good cash flow for extended periods of time.
Bad property management
Bad property management is another cash flow killer in real estate investing. Property management is the part that deals with the property’s daily operations. These include tenants complaints, rent collection in addition to maintaining the property and the legal aspects. Failure in handling these matters will definitely kill your cash flow.
If you are not confident about managing your property yourself, you can always hire professional property management to do it for you. Either way, make sure you keep up with your rental property’s performance so it won’t affect your cash flow.
Finally,
Learning all about real estate terminology and numbers is not all there is to real estate investing. To cut it short for you, we would love to suggest that you use the rental property calculator. This tool has done wonders for many real estate investors throughout their investing journey. It has given many investors the insights on how to invest for cash flow. So, why not join the club of the most successful real estate investors?!
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