When looking at real estate properties as financial investments, you will have to decide whether an appreciated value or positive cash flow is your main goal for getting properties. There are some things you need to consider before you make that decision.
Since you would more than likely be looking at single family homes and multifamily homes, there is a difference between the two.
With the former, the value of the property usually increases in value quicker. However, since more expenses are attached, you may not be looking at the kind of positive cash flow that you want.
On the other hand, multifamily units (i.e., duplexes) can generate more positive cash flow. However, they may not appreciate quickly like single-family homes do. Also, not as many expenses are attached to the latter.
Since most real estate investors look to create wealth, they will choose having a positive cash flow. In this case, you will need a reliable real estate agent that is willing to help you find real estate properties that will produce the positive cash flow you want.
Look at the balance sheets and see what you will look forward to as far as repairs, maintenance, fees and other miscellaneous expenses.
In order to maintain a steady stream of positive cash flow, you need to have the right tenants, so take your time. There are some people who will spend lots of money on real estate courses that don’t teach much of anything.
They end up being back at square one. Find a good real estate agent that is willing to genuinely help you. Sometimes, you may be fortunate enough to find one that is also an investor on the side.
Calculating Your Cash Flow
As a real estate investor, you need to be able to calculate all of the cash flow that comes from your properties. You want to make sure that you are making a profit. You will also be able to make decisions on real estate investments that you may purchase in the future.
In order to calculate your cash flow, you will need to add up how much rent you will get from your tenants. If you have more than one unit, take into consideration any vacancies you may have. Depending on how your property looks, include a small percentage of the vacancy rate into the equation.
With the total rental amount, get a figure for your losses. You will have to include property expenses, mortgage loan interest and property depreciation.
Deduct the expenses from your total rental income in order to get your losses or savings for taxes. With that, you will either add or deduct that from your expected amount from your tenants. Take your operating expenses and monthly mortgage payment(s) and deduct them for a second time. The result will be your cash flow.
When you come up with a cash flow amount, you will be able to figure out how much you will charge for rent if you decide to purchase future real estate properties. It’s important that whatever money you make, that you don’t squander it. Put it away because eventually you will need it for other things relating to your investment properties.
Changing Negative Cash Flow To Positive Cash Flow
When you have negative cash flow, you are not making a profit. You are paying out more in expenses than you are taking in as profit. That’s not how you want to operate when you’re investing in real estate properties.
Here are some ways that you can chance the negative cash flow to a positive one:
- Implement a rent increase. Only increase it to the amount of the current market. Don’t overdo it, other wise you may not have any tenants.
- Make the tenants pay the utilities. This would relieve a burden from you. Besides, since they are living in your property, they will be using utilities every day.
- Go over your property taxes to see if you can find anything that may have been missed before. Who knows-you may find out that you were charged more in taxes than you should have been charged.
- Contact your insurance company and see about paying more for your deductible. Then make inquiries about getting a better deal for coverage on the property.
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