All You Need To Know About Cash Flow Investment Property
Everyone who is looking for an investment property needs to put down a significant deposit. You can find various options for investments when it comes to investing in cash flow investment property, but before that, you must know what it means.
Positive Cash Flow Investment Property
Investment or rental properties can have either a positive or negative flow in terms of cash. Real estate investors who want to make money look for a property with positive cash flow only. The positive investment property strategy involves approaching properties where monthly income exceeds holding costs. Besides, it helps in generating excess cash flow for your pre-tax payments. These properties can also help in balancing your portfolio, as you can use the cash generated from them to repay your debts or deficit that is associated with other holding properties. Moreover, it increases your business serviceability as it attracts more lenders. Generally, having two or three positive cash flow investment property is a sign of success as it brings in money, no matter how small the profit is.
How important is cash flow for an investment property?
Cash flow is the amount the surplus of profit over expenses related to your real estate investment. Therefore a positive cash flow investment property is that real estate property that helps in generating excessively more income than what it cost in actual. The profit can be calculated either monthly or yearly, but most investors prefer to calculate them on an annual basis. For a successful real estate investment planning, calculating cash flow is imperative. Besides, it gives you an idea of the possible expenses that are likely to happen and how they are going to reflect your rental property’s profitability.
How to calculate cash flow on the property?
A real estate investor needs to use a spreadsheet and calculator in order to determine the positive cash flow investment property and calculate its value manually. However, it is a very time-consuming and daunting task, especially if the investor has more than 3 or 4 properties. Therefore, the emergence of numerous online sources and platforms takes place to calculate and determine the positive cash flow investment properties.
• Calculating Cash Flow From Operations
The first and foremost step in determining the value is to know the net operating income. It includes day to day expenses like property taxes, management costs, property maintenance, vacancy costs, and other overhead costs. In order to calculate NOI, you are just required to subtract all the expenses from the gross income i.e., the amount of money your tenants pay you.
• Calculating After Financing
Most of the investors use borrowed money to invest in real estate properties. In order to ensure you still have to pay your mortgage later, it is essential to calculate your cash flow after financing. For instance, the price of the property is $ 120000. After paying 25% as down payment, you finance the rest at 2% for 20 years. You can then calculate how much you need to make a mortgage payment every month and deduct it from the cost of the operations.