Real Estate Investing "Positive Cash Flow Is King."
There are many ways to make money and (IMO) real estate investing just happens to be one of the very best investment strategies due to flexibility and diversity as well as the fact that you own an asset that’s tangible. And compared to other investments such as stocks (which is not a tangible asset) investing in real estate offers a wide range of ways to make money which should be the goal of all investors.
When it comes to making money in real estate investing, one of the best ways is through buying positive cash flow rental properties. Although, there are other important factors when it comes to investing in rental properties that determine profitability such as “real estate appreciation.” Buying positive cash flow rental properties is the safest way to ensure a good return on investment. And that is why it is so important to figure out “how to buy rental properties with positive cash flow.”
All successful real estate investors understand the importance of “positive cash flow.” And to understand positive cash flow, it is important to know what cash flow is.
So, let’s talk about cash flow in simplicity. Cash flow offers only two components – income and cost! Cash flow (whether positive or negative) is the difference between the income received and the money going out. You need to account for all the all expenses associated with the purchase of the property “as well as” the expenses it takes to run and maintain the property (mortgage payments, property taxes, insurance fees, maintenance fees, management fees, and repair fees.) One of my favorite things about investing in rental properties is the ability to influence both components of cash flow – cost and income.
As I’ve mentioned – it is so important to figure out how to buy rental properties with positive cash flow. After all, you want to make money from your real estate venture. But here’s the deal – it is difficult to accurately calculate the two components of cash flow before you actually own the property. But the good news is – there are ways to predict whether or not the cash flow will be positive, flat, and or negative. And one of the simplest ways for real estate investors seeking cash flowing properties is to use something called the Cash Zone Formula.
The Cash Zone Formula = (Gross Annual Rent/Purchase Price) x 100 = Cash Flow Zone Percentage.
For example, you wish to buy a property for $400,000, and you’ll end up getting $3,500 monthly rent. The annual rent of the property will be $42,000. When you divide that by the purchase price of $400,000, multiplied by 100, you should end up getting 10%.
By using the Cash Zone Formula, you should have a general idea whether or not you’ll have a positive cash flow real estate rental property “or” a negative one by following 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.
I hope you find the above information helpful. And in conclusion, here are a few more helpful tips every real estate investor needs to know about when buying positive cash flow real estate properties:
1. Location, location, location. You want to choose the best location for positive cash flow real estate investments. Study various real estate markets in the US and preferably go for real estate markets that you are already familiar with and know.
2. Identify several properties that would be good candidates for positive cash flow real estate rental properties.
3. Invest where there are renters, you’ll want to make sure the rental property is located where there’s a large pool of potential-renters. Good areas include neighborhoods near schools, near freeways for easy commutes, near employment centers, downtown business districts, and shopping centers.
4. Get comps and conduct real estate market analysis for your specific locations.
5. Budget carefully for both rental income and rental property expenses.
6. Be well aware of your financial situation in advance. Select the most suitable financing option.
7. Find out and understand available property tax deductions.
8. Pick your tenants carefully to avoid long vacancies and to protect against unwarranted damage to your investment property.
9. Consider doing economical renovations that will make your new income property look more luxurious to potential renters.
10. Keep your investment property well maintained to ensure you’ll always be able to charge the maximum rent level.
11. And lastly, be smart, be passionate and remember to always look for options to grow your real estate business.
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