When it comes to real estate investing, one of the key determinants of your success is ensuring that your property is cash flow positive. Rental property cash flow is basically the difference between the total rental income and the total expenses of holding and operating the investment property. It’s important to note that cash flow is different from net operating income (NOI), which doesn’t account for debt service.
Positive cash flow is when the rental income exceeds the rental property expenses. If an investment property doesn’t create substantial cash flow right from the start, it can lead to a risky scenario for the real estate investor. A landlord with a negative cash flow property will be losing money each month.
But why is having a cash flow positive rental property important?
Why Should You Invest for Cash Flow and Not Appreciation?
Firstly, cash flow properties are a low-risk investment because you have two ways of making money and not just one. Even if the value of the investment property does not rise as expected, you can still turn a profit. You don’t have to rely on market price fluctuations to make money. On the other hand, a negative gearing strategy allows you to make money only through appreciation. If the rental property doesn’t go up in value at the expected rate, you will run at a loss.
Secondly, cash flowing real estate is a good strategy for low-income earners. With this strategy, it is easier for low-income earners to service their loans and expand their portfolios. Cash flow positive rental properties pay for themselves and you can pocket the extra money. Negative geared property investing can be challenging if you are not a high-income earner. This is because you need to be able to afford the expensive monthly payments.
If done right, cash flow properties can also lead to financial freedom, thus allowing you to quit your job. With each cash flow positive property you acquire, you will be increasing your monthly income. The rental rate will also increase over time. After some years, you could earn enough income to support your lifestyle. Consequently, it can be a good retirement plan.
Capital growth investments are too risky for beginner real estate investors to consider. Even in a hotly appreciating market, acquiring a rental property with negative cash flow for capital gains may not be a wise move. This is because the real estate market is quite unpredictable. It may not always go upwards. Therefore, appreciation can not always be guaranteed.
As a real estate investor, you should focus on getting your rental property to cash flow positive from the start rather than later. This will prevent you from getting yourself into a sticky financial situation.
Here are different ways to get your rental property cash flow positive right from the start.
Ways to Get a Rental Property to Cash Flow Positive from Month #1
1. Buy a Positive Cash Flow Rental Property
The first and most important step to getting a rental property to cash flow positive from the first month is buying a cash flow positive rental property. In other words, you want to find a rental property for sale with high rental income potential which is greater than the total rental expenses. This will need a systematic cash flow analysis.
Thankfully, Mashvisor can help you find and analyze cash flow properties efficiently and accurately. Use the following tools to find cash flow properties in a matter of minutes:
Real Estate Heatmap
Your search for a cash flow positive rental property should begin with finding the right real estate market at the city and neighborhood level. Where your rental property is located will determine the cash flow and return on investment.
You can find the best cities to invest in real estate by checking out Mashvisor’s real estate investment blog. Next, you need to find a profitable neighborhood within the city where you can easily find a cash flow positive rental investment. Therefore, conducting a thorough neighborhood analysis is crucial. It will help you narrow down your property search to a smaller area with high cash flow potential.
Mashvisor’s heatmap analysis tool can help you locate top-performing neighborhoods in your city of choice based on metrics such as listing price, rental income, cash on cash return, and Airbnb occupancy rate. You should focus on neighborhoods with a combination of low median listing prices, high rental income, and high cash on cash return.
Once you have found the right real estate market to invest in, finding cash flow positive rental properties becomes easier. You can easily search for profitable investment properties in your target location using Mashvisor’s Property Finder. This tool allows you to search for rental properties for sale in the U.S. real estate market that match your criteria using the following filters:
- Location (you can search in multiple cities at once!)
- Property type
- Rental strategy (Traditional or Airbnb)
- Number of bedrooms
- Number of bathrooms
Cash Flow Calculator
After finding rental properties that match your criteria, it’s time to do a cash flow analysis on the individual properties. To accurately and efficiently do the cash flow analysis, you should use the right tool. Mashvisor’s cash flow calculator is the best tool for this purpose. It will provide you with accurate estimates of the potential cash flow for a rental property.
Moreover, the calculator provides comparative data for both Airbnb and traditional rental strategies. This will help you determine the optimal rental strategy for a rental property in terms of positive cash flow.
2. Conduct a Property Inspection
If you want your rental property to be cash flow positive from the first month, you should avoid investment properties with potentially huge repair costs. Even if you are buying an investment property below market value (like distressed properties), it’s not a guarantee that you’ll have positive cash flow. Before you buy a rental property, hire a professional property inspector to get you a clear report on the overall condition of the investment property.
After reviewing the report, get an estimate of the cost of repairs. This will prevent you from buying a rental property that needs major repairs that will eat into your budget. Moreover, the property may have to stay vacant until the repairs are completed. If this happens, you will lose the potential rental income you could have earned during this period.
3. Choose the Right Investment Property Loan
The right investment property loan can make the difference between having a cash flow positive property and a rental property that costs you money every month.
As you know, the lower your rental property expenses are, the more likely your rental is going to be cash flow positive. And since your mortgage payments will be your biggest expense, reducing them can save you a significant amount of money and improve your cash flow.
Therefore, when looking for a mortgage lender, be sure to shop around for the best deals or get a mortgage broker to do it for you. Remember, even a 1% difference in the interest rate could save you a lot of money.
Also, don’t forget that putting a large down payment (at least 20%) can help you secure lower mortgage rates and lower your monthly payments.
4. Buy a Tenant-Occupied Property
Buying a house with tenants will ensure immediate rental income. This will save you the trouble of finding potential tenants, which needs a lot of marketing. Sometimes, it may take you several months before you find a tenant. However, if you do your due diligence, you can find an occupied rental property that is cash flow positive. You can start searching for one now in the Mashvisor Property Marketplace.
The downside to buying an occupied rental property is that you may be locked into an old lease you don’t want. The tenants might also be problematic.
5. Set the Right Rent Price
To have a cash flow positive rental property, you should also pay attention to how you set the rent price. Overpricing the rental could lead to a high vacancy rate, resulting in negative cash flow. Conversely, if you price the house too low, you could lose a lot of potential rental income. So, how do you know how much to charge for rent?
The best way to establish the optimal rental price is to check what other comparable rental properties (rental comps) in the neighborhood are charging. From this, you can set a competitive rental price. With the right rent price, your property will have a higher demand as soon as it hits the market.
The Bottom Line
Whenever you invest in rental property, your aim should be to generate a positive cash flow right from the start. The above tips will ensure that you get your rental property to cash flow positive from the first month so that you don’t end up losing money.
Be sure to use Mashvisor real estate investment app to find the best housing markets and rental properties in the U.S. for cash flow investing. Start out your 7-day free trial with Mashvisor now.