Investing in positive cash flow properties is the way to make money in real estate. With such properties, the rental income exceeds the costs of buying, owning, and managing the rental, and the positive difference between two numbers is the profit which goes into the pocket of the real estate investor.
Having said that, if you are planning to buy an investment property in 2020 to start your own rental business, looking for positive cash flow properties is a must. Easier said than done though. The pressing question becomes: “How to find positive cash flow properties in 2020?” Follow our 5 easy steps, and you’ll be on your way to making money from real estate before you know it.
What Is Cash Flow in Real Estate Investing?
Before we go into the details of how to find positive cash flow properties in the coming year, let’s have a quick look at this real estate concept. We’ve already mentioned that real estate cash flow is the difference between the rental income and the ongoing expenses associated with the property. It is usually calculated on monthly basis.
So, how to calculate cash flow?
To do that, you have to calculate the two components of it: rental income and recurring costs.
How to calculate rental income? That’s easy. This is simply the monthly rent which you get from your tenants in case of traditional rental properties or from your Airbnb guests in case of short term rentals.
How to calculate costs? This one is a bit more complicated. Buying, owning, and running a rental property might entail more expenses than you’ve ever imagined. Here is a comprehensive list of the monthly expenses which go into calculating cash flow:
- Monthly mortgage principle/interest payment (in case you take a loan instead of paying in cash)
- Property tax
- Property insurance
- Property management
- Rental income tax
- Property maintenance
- HOA dues (if you invest in a condo)
- Utilities
- Cleaning fees (if you buy an Airbnb investment property)
To find positive cash flow properties, you need to be able to come up with accurate estimates of all these numbers.
Let’s look at an example of how to calculate cash flow in real estate investments:
You, as a beginner real estate investor, buy a rental property in the M Street neighborhood of the Dallas real estate market. It costs $219,000, and you finance it with a 30-year fixed mortgage with an interest rate of 4.42% with a typical 20% down payment for rental property. This adds up to a monthly mortgage payment of $883. According to rental market analysis conducted by Mashvisor’s investment property calculator, the comparable rental income for this traditional rental property is $3,780, based on rental comps from the neighborhood. The rest of the monthly expenses are as follows, once again computed by Mashvisor’s rental property calculator:
- Property tax: $210
- Property insurance: $91
- Property management: $378
- Rental income tax: $529
- Property maintenance: $183
- HOA dues: $0
- Utilities: $170
- Cleaning fees: $0
You can also see a summary in the screenshot below:
Mashvisor’s Investment Property Calculator: Monthly Expenses for Dallas Rental Property
According to the real estate cash flow formula:
Cash Flow = Rental Income – Rental Expenses
Cash Flow = $3,780 – ($883 + $210 + $91 + $378 + $529 + $183 + $170) = $1,336
This difference means that this Dallas investment property will generate a positive cash flow of $1,336 when rented out on long term basis.
What is good real estate investment cash flow? Basically, good cash flow is positive cash flow. And obviously, the higher the cash flow the better as that’s the way of making money with rental properties.
How to Find Positive Cash Flow Properties in 2020
Now that we know what cash flow for rental properties is, how to calculate it, and why it should be positive, let’s move on to the steps needed to find the best cash flow investments in real estate.
1. Find a Good Location for Real Estate Investment
The place where you buy rental property is the key determinant of positive cash flow. Location affects all aspects of an investment property including the property price, the rental income, the costs and expenses, the tenant tool, the optimal rental strategy, and others. Try looking for markets with affordable prices of homes for sale as this will lower your mortgage payments.
One particular metric you should look at is the price to rent ratio in the US housing market 2020 which you are considering, especially if you’re interested in buying a traditional rental property. Ideally, you should look for a location with low price to rent ratio in order to find a positive cash flow real estate investment property. However, you need to conduct real estate market analysis to assure enough demand for your preferred rental strategy.
Another thing you can try is to explore the states with no property tax as this will push down your recurring expenses.
To help you narrow down your search, here are the 10 Best Places to Invest in Real Estate in 2020.
2. Identify the Best Neighborhoods in the Market
Once you’ve chosen your real estate market for buying an investment property in 2020, you have to perform neighborhood analysis to locate the top areas for investing in rental properties.
How to do that quickly and efficiently? Use Mashvisor’s heatmap analysis. In any US housing market, you can search for neighborhoods by:
- Listing price
- Traditional rental income
- Traditional cash on cash return
- Airbnb rental income
- Airbnb occupancy rate
- Airbnb cash on cash return
Related: Finding Income Properties Using a Heatmap
Using the neighborhood heatmap, try to identify a couple of neighborhoods which have relatively low home values (to push down your mortgage payments) and high rental income. Looking at the cash on cash return is also a good indicator whether you will be able to find positive cash flow properties in this location.
Here we show you a screenshot of Dallas neighborhoods by listing price:
Mashvisor’s Heatmap: Dallas Neighborhoods by Listing Price
3. Search for Top-Performing Investment Properties
After you’ve selected a few neighborhoods with Mashvisor’s heatmap, one of the must-have real estate investment tools in 2020, you can continue your neighborhood analysis by looking at the figures for each particular area.
Let’s have a look at the M Street neighborhood in the Dallas housing market from above. According to Mashvisor’s rental investment calculator:
- Median property price: $485,000
- Average price per square foot: $201
- Average traditional rental income: $2,325
- Average Airbnb rental income: $2,830
- Average traditional cash on cash return: 0.90%
- Average Airbnb cash on cash return: 1.23%
- Average Airbnb occupancy rate: 55%
- Optimal rental strategy: Airbnb
- Optimal property type: townhouse
- Optimal number of bedrooms: 3
Now that you know what property type and property characteristics are most likely to get you high return on investment, you can narrow down your property search to these criteria.
Use Mashvisor’s Property Finder to find a few potentially positive cash flow properties with these details. Here’s a screenshot of the type of data you’ll get:
Mashvisor’s Property Finder: Dallas Homes for Sale
4. Analyze the Investment Properties for Sale
The next step in how to find investment properties with positive cash flow is to conduct rental property analysis. Use Mashvisor’s investment property analysis calculator to get all the numbers you need: rental income and monthly expenses. Moreover, you will get estimates of the expected rate of return including cap rate and cash on cash return – whether you rent out on short term or long term basis.
Actually, the best part is that this investment tool will calculate the cash flow for you, for both the traditional and the Airbnb rental strategy.
Mashvisor’s Investment Property Calculator: Rental Property Analysis of a Dallas Property
5. Hire an Agent
Working with a real estate agent is highly recommended, especially if you are a new investor. This professional will be able not only to help you find profitable investment property but also to get the best possible purchase price. Agents are expert negotiators and can drop the listing price significantly. This will definitely increase your chances of ending up with a positive cash flow property.
How to Increase the Positive Cash Flow of Your Rental Property
Buying an investment property with potential for high cash flow – and thus good cash on cash return – is crucially important. However, there are a few tricks that you can do to further push up the cash flow of your real estate investment. Here are our 7 tips:
1. Invest in multi family homes as they tend to have higher cash flow.
Related: What Are the Best Multifamily Markets 2020 with High Cap Rate?
2. Make a larger down payment if that’s within your budget.
3. Make some cost-effective repairs and fixes to be able to charge higher rent.
4. Screen your tenants or Airbnb guests carefully to minimize maintenance costs.
5. Keep your tenants happy to minimize turnover and vacancy costs and optimize rental income.
6. Choose the best rental strategy for the location and the property type.
7. Evaluate whether managing your rental on your own or hiring a professional property manager will be more cost-efficient and generate higher rental income.
Related: Real Estate Investing: Traditional vs. Airbnb Investments
With 2020 approaching, there are some exciting real estate investing opportunities in the US housing market. To get your share of the profit, follow the 5 steps of how to find positive cash flow properties. To get access to all Mashvisor’s tools to facilitate your real estate market analysis and investment property analysis, sign up for a free 14-day trial now.
