Every potential real estate investor wants to know the ‘secret’ to earning profit in real estate investing. This ‘secret’ is no more than an obvious answer, and the ultimate goal of buying a rental property: having positive cash flow properties.
Positive Cash Flow Properties – The Most Important Things in Real Estate
What Are Positive Cash Flow Properties?
What exactly are positive cash flow properties, also known as positive geared properties? They are properties that actually make money for real estate investors. If you’re a beginning real estate investor, you may be asking yourself, “Well, aren’t all investment properties meant to make money?”. The answer is yes (unless we’re talking about purposefully negative gearing properties, a topic for another day), but not all properties do make money. Some rental properties do the exact opposite; they spend more money than they make.
With these two concepts, making versus spending, in mind, we can arrive at a definition of positive cash flow. Positive cash flow is a situation in which an investment property makes more in rental income than it spends in rental expenses. Another way to phrase this is to say that positive geared properties have a net difference of income and expenses that is positive.
How to Calculate Positive Cash Flow?
Positive cash flow is calculated, according to the definition, as:
Positive Cash Flow = Rental Income – Rental Expenses = + $$$
This calculation is simple and innocent. It can help real estate investors know if they are making money or losing money on an investment property during a certain time period. While the calculation is certainly not beyond basic arithmetic, one part of the calculation can be tricky to obtain.
The part we are talking about, of course, is rental expenses. The reason summing expenses can be difficult is that there are so many of them to consider. Examples of only common expenses include but are definitely not limited to: management fees, repairs, property taxes, income tax, utilities, HOA fees, mortgage interest, and property insurance.
How can real estate investors tackle this problem? They could decide to manually, and tiresomely, approximate and sum up the costs. Or, they could use Mashvisor’s investment property calculator, which sums up and presents costs for them in a matter of seconds.
Why Are Positive Cash Flow Properties Important?
Besides the fact that having positive geared properties means making money in real estate, positive cash flow has other importance as well. Positive cash flow is the essence of ROI, or return on investment, in real estate investing. The two most common ROI metrics, cash on cash return and cap rate, are strongly influenced by a rental property’s cash flow.
Positive cash flow, cash on cash return, and cap rate also serve another purpose when buying a rental property. These real estate metrics are used for property comparison in real estate market analysis. Beginning real estate investors may not know how to narrow down potential investment properties in terms of profitability when buying. Using a combination of positive cash flow, cash on cash return, and cap rate, however, will always point investors to the most profitable real estate investing deal.
Positive Cash Flow Properties – Search and Analysis
Finding a Location
Now that we know what positive cash flow properties are, it’s time to answer the second question in the blog’s title: How do you get a positive geared property?
Unfortunately, positive geared properties do not grow on trees. Instead, they must be created or searched for. So, this takes us to the first step to buying an investment property: search for a suitable location.
Searching for a location when buying a rental property is done in one of two ways. The first, old-fashioned, yet still useful way to find positive cash flow properties is to rely on word-of-mouth and common advertisements. This method is rock-solid for real estate investors looking to buy an investment property in an area they are familiar with. The con with this way is that comparing, let alone finding, other properties is not as easy.
The alternative is to use property search engines. Smart search engines, like Mashvisor’s, search for properties based on the investor’s selected criterion and predictive analytics. With the property heatmap, real estate investors can find the perfect property that best suits their real estate investment goals and needs.
Choosing the Optimal Rental Strategy
Location, as just covered, is essential when wanting to buy an investment property. The second most important aspect of positive cash flow properties is the rental strategy. By rental strategy, we are not referring to differences in leases, such as month-to-month or long-term leases. Rather, we are referring to whether the property is rented traditionally or through Airbnb.
Choosing a rental strategy is sometimes based on the investor’s liking. While there is nothing wrong with basing the decision this way, the better way is to let data help you decide. With Mashvisor’s investment property analysis, this is easily done. The optimal rental strategy, based on factors including investment goals, is displayed with each investment property in Mashvisor’s search.
Maximizing Rental Income, Minimizing Rental Expenses
Last but definitely not least, when wanting to get positive cash flow properties, it is obligatory to maximize rental income and minimize rental expenses. Both of these variables are key factors in the cash flow calculation, and thus directly impact cash flow. However, there is a balance to upkeep with rental income and rental expenses. For instance, real estate investors should not charge unreasonably high rent or neglect required rental expenses to save money.
The first way to maximize rental income is to make sure you are charging the right amount of rent. This is done by taking a percentage of a property’s FMV, or fair market value. A property that is over $350,000 should charge 0.8% of the FMV. A property that is lower than $350,000 should charge 1% to 1.1% of FMV as rent. Real estate investors can then maximize rental income by adding new amenities and renovating the rental property.
The best way to minimize rental expenses is to minimize mortgage payments, typically the costliest expense. Be sure to secure proper financing to reduce mortgage payments.
For more on finding and having positive cash flow properties, start your trial with Mashvisor to use its search engine and investment property calculator!