Real estate investing is one of best investment strategies because of the diverse opportunities and flexibility which it offers and because of the fact that you own and manage tangible assets. Real estate investments are not only relatively safe (compared to other investments such as stocks) but also provide many different ways to make money which eventually is the goal of any real estate investor. Nonetheless, the best way to make money in real estate investing is through buying positive cash flow real estate rental properties. While real estate appreciation is also an important factor which will determine your long-term profitability, you should always go for positive cash flow real estate investments only as that’s how you get good return on investment and start making money from your investment properties right away. So what is left is to figure out how to have positive cash flow real estate income properties.
Related: What Are the Best Cash Flow Investments?
What Is Cash Flow?
Before going into the matter of how to find positive cash flow real estate, it is important to know what cash flow is. It’s simply the difference between what you make from your investment property (rent or rental income) and what you spend on it (all costs and expenses associated with paying for the income property – mortgage payments, owning it – property taxes, and managing it – maintenance and repair costs). That’s one great thing about real estate investing compared to investing in stocks. Once you buy stocks, there is not much if at all that you can do about your profitability from them. In real estate investments, on the other hand, you can affect both components of cash flow: your rental income and your costs. There are certain tricks to boost your rental income and others to lower your expenses.
Why Is Positive Cash Flow Real Estate So Important?
The answer to this question is a simple one: because you want to make money from your real estate business. If your cash flow is negative, then you are losing money from your rental property, at least in the short run. If your cash flow is zero, it means that you are just breaking even, and that should not be the goal of any real estate investor. If, finally, your cash flow is positive, you are making money from your real estate investment. And the more money you make, the better, of course. Before figuring out how to find positive cash flow real estate properties, one should know how to decide whether a rental property will generate positive cash flow or not.
How Do Know if You Are Going for a Positive Cash Flow Real Estate Property?
It is not always realistic in real estate investing to have accurate calculations of the rental income and the costs of running an income property before you actually start renting it out to tenants. That’s why it’s important to find another way to predict whether cash flow will be positive or negative: through the cash-zone formula.
Cash-Zone Formula (Cash Flow Formula):
Cash Flow Zone Percentage = (Gross Annual Rent/Purchase Price) x 100
So, if you buy an investment property for $300,000 and rent it out for $2,000 per month:
Cash Flow Zone Percentage = (12 x $2,500/$300,000) x 100 = 10%
So, what do you do with this number to know whether you will have a positive cash flow real estate rental property or a negative one? Just follow the basic rules below:
- Cash Flow Zone Percentage below 8%: You will most probably not get positive cash flow;
- Cash Flow Zone Percentage between 8% and 10%: You will most probably get positive cash flow;
- Cash Flow Zone Percentage above 10%: You will definitely get positive cash flow.
To conclude our example from above, it is a good investment idea to consider this rental property with 10% cash flow zone percentage as chances are it might be bringing you some positive cash flow.
How Do You Find/Make Positive Cash Flow Real Estate Properties?
Finally we’ve arrived to one of the most important questions in the real estate investing business: how to find or make positive cash flow real estate properties. As mentioned above, there are basically two ways to do that: by increasing your rental income and/or by decreasing your recurrent expenses. But it is also very important to start by buying a rental property that has the potential to be a positive cash flow real estate investment. Following are a few quick steps outlining the process of buying an appropriate investment property and making sure it becomes and stays a positive cash flow one:
Related: How to Find Positive Cash Flow Properties
1. Study various real estate markets within the US and choose the best location for positive cash flow real estate investments. Preferably go for a real estate market that you are already familiar with if you have a choice.
2. Research your selected location well. For future real estate investments, try to stick to the same location to capitalize on the knowledge you will have already gained about it.
3. Conduct real estate market analysis for your specific location to get the comps.
4. Identify a few properties that would be good candidates for positive cash flow real estate rental properties.
5. Use your real estate network to help you find such income properties and get estimates of all the figures you need to make your calculations.
6. Budget carefully for both rental income and rental property expenses. Be well aware of your financial situation in advance.
7. Perform investment property analysis.
8. This one is a must: Use a rental property calculator like the one offered by Mashvisor to save lots of time, money, and efforts on the real estate market analysis and investment property analysis. Moreover, a highly interactive and reliable investment property calculator like Mashvisor’s, which uses both actual and predictive analytics, will provide you with very accurate forecasts which you cannot obtain in another way.
Related: Is Life Even Possible Without a Rental Property Calculator?
9. Choose the most appropriate financing option.
10. Do some cheap renovations that will make your new income property look more luxurious. This means that you will be able to charge higher rent than comparable surrounding rental properties.
11. Choose your tenants carefully to make sure they pay the rent on time and do not cause unreasonable damage to your investment property.
12. Avoid long vacancies by selecting tenants who are likely to stay longer and by marketing your rental property well.
13. Learn about and make use of available property tax deductions.
14. Consider different rental strategies including traditional and Airbnb.
15. Keep your investment property well maintained to be always able to charge the maximum rent level.
Here is what every real estate investor needs to know about positive cash flow real estate properties: from what it means all the way to how to have such a rental property. By following the few steps highlighted above, you should be able to start making some serious money in real estate investing soon. Remember to always look for options to grow your real estate business and ways to make extra money from your real estate investments to earn your place among the successful real estate investors in the US.
