Cash flow in simple terms can be termed as the difference between the rental income of an investment property and its expenses. It is a basic investment formula that tells a real estate investor if he/she is making money and how much of it is made. A positive cash flow property is an investment property that generates more rental income than expenses.
How much good cash flow is good for an investment property? Like many other things in real estate, the answer differs due to a number of factors involved in calculation cash flow.
The one thing that is a must for an investor is to invest in a positive cash flow property. The more positive cash flow an investment property has the better. From there it depends on the investor, how much cash flow is the good cash flow for the property he/she is aiming to invest in.
The following things an investor should consider before buying a property that will generate positive cash flow.
Location
The three most important factors when buying a home are location, location, and location. Sounds familiar, doesn’t it? Why is it so important?! Simply because location of a property cannot be changed while the size, condition and other thing relating to the property can be altered. It is the most important factor for cash flow analysis. Number of expenses (property taxes, condo fees etc) and the rental income are directly influenced by the location of the property.
Type of Property
The type of rental property is vital when figuring out how much cash flow is good for rental property. If a property has multiple units it will bring more income. Analyze the rental demand in the area. If it is close to the financial hub, it will be easy to rent and for more money. The tenants will be of good quality and as an investor will give you peace of mind. The properties that are close to a college or a university are lucrative as well but if a property is a student housing you should check with your financial institution regarding the financing aspect as some of them don’t prefer student housing.
Financing and Down Payment
The financing of an investment property plays a big role in cash flow analysis. The rate of interest and amount of down payment and mortgage term can have a huge impact on the cash flow of the property. To figure out how your investment property’s financing impacts your cash flow, Consult a professional realtor or a mortgage broker. There are numerous online tools available that can be used for a simple analysis.
To conclude it can be said if you invest in the market wisely after proper analysis you’ll begin building equity, growing your portfolio and amassing wealth.
Balwant Bhangu | Pre-construction & New Homes Specialist
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