As rental property investing continues to grow in popularity, many investors who are just starting out can get carried away with the glamour of their property. This tends to make investors forget about the fundamentals of real estate investing, which is positive cash flow. Let’s take a look at how you can ensure your real estate investment has positive cash flow!
Qualify Your Investment
To start out, find an area with potential to grow or is already growing. It helps if you have prior knowledge of the communities if that area. If you currently live in an area that is booing with real estate investing, start there.
Get to know the demographics, income level, education, background, schools, crime level, occupation, and population of the resident’s in that area. This will all factor into how much you can charge for your monthly rental.
Once you’ve studied the who, what, and where of the area, consult with a real estate professional such as a residential property management company or a real estate agent. Their expertise can benefit you when planning your investment strategy.
Ideally you’ll want to purchase investments for at least 20 percent less than the location’s median price. You’ll also pay for inspections, appraisals and commission fees, which should be factored, into the cost of doing business.
Use this equation to get a rough idea of the profit potential of the investment.
(Gross Annual Rent/Purchase Price) x 100 =
If the answer is eight percent or more, you’ll be fine. Anything over 10 percent is pretty much a home-run. A number below eight percent is likely to be problematic. Keep in mind that taxes, maintenance expenses, and vacancy costs will be to factored in as well.
If you want to go in depth on how to accurately forecast cash flow for any rental property, we’ve written a guide on how to do so.
Vacancies, Repairs, and Maintenance
When old tenants move out, it’s extremely rare for new renters to move in the same day. Mandatory repairs are needed as well. This all adds into the vacancy period in between tenancies that most real estate investors forget.
Usually, landlords must repaint the unit, clean it up, and potentially replace the carpets. If you are ambitious and want to flip the kitchen, take a look at a handy tool for estimating the cost to remodel a kitchen by our partners at Kukun to get you started.
Basing your decision on the numbers, rather than a gut feeling or emotional response will help guarantee positive cash flow on your property.
Found this article useful and is now inspired to invest in property? Schedule is FREE rent analysis to see how much your property is worth!