Once you buy an investment property, you commit to paying off debt for about 30 years, which can seem like a Herculean task!
But, there are simple ways to monetize your property. The secret is to have positive cash flow.
Positive cash flow is the goal of every real estate investor. Whatever strategy you plan to put in place, an investment property that can generate regular income is your end goal if you want your property to be self-financing through rental income.
So how can you achieve this? Read on as we teach you how you can make your investment property profitable enough to be self-financing.
Investment property is real estate purchased and developed for the purpose of earning income. Typically, owners make money by holding and renting the property while it appreciates and then selling it for a profit.
To learn more about investment properties, read here.
Cash flow refers to the amount of money that flows in and out of a business. More specifically, it refers to the flow of cash in terms of income and expenses.
There are two possible scenarios. The first is a positive cash flow, which occurs when income exceeds expenses. On the other hand, when the expenses exceed the income generated, the investment is considered a negative cash flow.
Cash flow is used in properties that are used to generate income, such as rentals. In real estate, cash flow is the difference between a property’s income and expenses. A property can have positive cash flow, where there is more income than expenses and finance costs, or negative cash flow, where expenses and finance costs exceed income and you lose money. money every month.
The majority of investment property owners aim to buy real estate with positive cash flow. The higher a property’s cash flow, the more income the investor earns, which in turn can pay the property’s loan. It can also provide a safety net in the event of disruption to other sources of income (if any) or unexpected expenses at the property.
How to Calculate Cash Flow
Calculating cash flow for your investment property is simple. However, it is important to properly determine the income and expenses of your property to have a good estimate of your cash flow. Here are the things you need to determine:
- Gross revenue: This is the aggregate amount of income you generate from your investment property.
- Operating costs : These are the overall costs of operating an investment property to generate income.
- Net operating income: It is the result of subtracting expenses from your income. It refers to the profit you generate without including capital expenditure in the equation.
To calculate cash flow, subtract your capital expenditures (one-time expenses the real estate investor incurs at the start of the business) from net operating income.
As mentioned above, determining your operating expenses and income is important to know if your investment property is cash flow positive. Here are some factors to consider before buying an investment property:
Potential rental income
You can estimate your potential rental income for a rental property by comparing similarly priced and sized homes in the neighborhood that are currently rented.
Cost of repairs/renovation/maintenance
What repairs or renovations, if any, need to be done before it can be rented or leased? How long will the process take? What is the age of the assets included in the property? Remember to ask yourself these questions before buying a property.
Property management fees
If you are considering renting out your property, you need to consider whether you can manage as a landlord or if you will need help. If you hire someone to manage your property, make sure you are aware of the costs associated with hiring a property manager. A property manager will be responsible for managing advertising, screening potential tenants, scheduling inspections, and more.
Make sure you have a safety net for you and your property by getting insurance. It is recommended that you take out umbrella insurance for your rentals to strengthen your overall liability protection.
Do your research and check the property tax rates in the state/city where your property is located. Rates can vary greatly depending on the location of your property.
Be sure to factor in any utility or municipal rates you must pay to maintain your investment property. This may include waste collection payments to the council or maintenance of certain areas of your property.
Be prepared to pay your mortgage if your property does not generate income for a period of time due to a lack of tenants. This is why it is important to buy a property that is positively geared or an investment property that generates income in excess of its overall expenses, including loan interest and principal repayments. To learn more about positive and negative gears, read here.
As you can see, it is possible for an investment property to be self-financing. It will all come down to choosing a well-oriented property and following the right strategy. By following these tips, you can easily pay off your investment property mortgage.
Explore nestegg if you want more advice on how you can buy your Dream house or an investment property.