The phrase ‘cash flow’ is often used when it comes to buying real estate, because it is integral to an investor’s success. If you can charge rent, as the landlord, that substantially exceeds your overheads, the profit from this will allow you to accumulate wealth exponentially. In addition, it can be a vital safety net to tide you over when numerous vacancies appear, or if an unforeseen event occurs and you require emergency cash.
Make no mistake, unforeseen events can and do occur in real estate investing. These events could include rodent damage, a faulty wall having to be fixed, or a busy road being built near to your home. When faced with these types of difficult circumstances, most property investors dip into whatever spare funds they have – whether it’s credit lines, capital reserves, or a private lender network. Notwithstanding, many investors are unsure about what quantity of cash flow is sufficient to offer this safeguard, and enable them to expand their portfolios.
Determining the Right Level of Cash Flow
All investors should regard cash flow as the lifeblood of their business. Typically, you should aim for at least $300-$400 per property, however this might not be achievable every time. With some properties, you will get considerably more than this, while others will bring in less.
You might, for instance, own one house with a $100 per month cash flow. You may have a significant amount of equity in this property, even if its’ market value is low. On the other hand, you could own a property with a $1500 per month cash flow, which you renovated to attract higher end tenants.
Often, the properties that appear to offer the most cash flow are less expensive than other properties in the area. Such properties might not necessarily provide a lot of cash flow, once you deduct turnover and repairs though. In some areas, the cheapest properties are old and require far more repair work than newer properties. With newer homes, you will not need to spend much on maintenance, so you will have more cash flow.
In some markets, single family properties have better cash flow than multifamily properties. This varies from area to area however, so it is important to conduct thorough research before you invest. This way, you can identify the best kind of real estate in your locality.
Furthermore, it is wise to find out what the rent to price ratio is in particular neighborhoods. It is best to focus on areas where this ratio is high, because they are more lucrative. Also, you should try to select properties that are simple to rent and will appeal to stable tenants.
Ultimately, rather than concentrating on individual properties, it is better consider your property portfolio as a whole. This approach will help investors, regardless of their level of experience. Make sure that you know your average capital costs for your properties, and your average cash flow.
How Tax Considerations Affect Investment Ambitions
Certain types of investors have other ambitions, which mean that boosting cash flow is not so important to them. For example, if these investors have a large income, they might be searching for losses and tax write offs to reduce their tax liability. Bear in mind therefore, that boosting cash flow might not be the ideal strategy during some periods, as far as taxation goes.
Perhaps, prior to investing in another property, you could question your accountant about the amount you can increase your cash flow without dramatically raising your taxes. Appreciation and capital gains over the long run are of greater significance to other investors.
Cash Flow Boosting Methods
Nonetheless, many investors do want more cash flow, and there are several methods to accomplish this. Obviously, carrying out property renovations is a proven way to raise rent. However, this is difficult to do if you invest in high end real estate, which doesn’t need much improving. Suffice to say, you require more cash flow on higher value properties.
You will get better cash flow if you can secure a good deal on an investment home. Purchasing properties under market value is an excellent way of gaining instant equity and maximizing cash flow. It takes commitment and time to find good deals, but it is possible to buy properties at fifteen percent under market value. There are various books and online courses that teach you how to do this.
Single family homes tend to attract stable tenants, who treat the properties like their own and care for them better than flats. Also, tenants usually remain in these properties longer than flats. With fewer vacancies and less turnover, your cash flow will increase. In numerous markets, tenants normally remain longer in expensive homes, however the price to rent ratios often reduce with expensive properties. In this situation, you need to find a balance between rent to price ratios and stable tenants. Your cash flow is bound to reduce, if you are renting a property each year and have a vacant month.
Another way to raise cash flow is to inspect your rental homes frequently. You can do this in several ways. Just driving by the property will tell you a bit about it, however it is better to enter the premises if possible. Performing furnace filter replacements every half year will ensure that the furnace runs OK, and allow you to view the property indoors. Should your tenants own a pet that is damaging the property, or if they are subletting the property to another family or damaging the property themselves, an indoor viewing will enable you rectify the situation fast. This way, you can minimize the repair costs.
Finally, you can use standard arbitrage to obtain better cash flow. This is where you use some of your property equity to invest elsewhere, making a greater return than your rate of interest. While cash flow can help you to develop and maintain a property portfolio, combining this with tax saving and arbitrage techniques, like accepting passive losses, will allow you to grow your wealth quicker.