Cash Flow – What is Cash Flow
[/vc_column_text][vc_raw_html]JTNDaWZyYW1lJTIwaGVpZ2h0JTNEJTIyMTAwJTI1JTIyJTIwc3JjJTNEJTIyaHR0cHMlM0ElMkYlMkZ3d3cueW91dHViZS5jb20lMkZlbWJlZCUyRldIUUFqVm5WeTQwJTIyJTIwZnJhbWVib3JkZXIlM0QlMjIwJTIyJTIwYWxsb3clM0QlMjJhY2NlbGVyb21ldGVyJTNCJTIwYXV0b3BsYXklM0IlMjBjbGlwYm9hcmQtd3JpdGUlM0IlMjBlbmNyeXB0ZWQtbWVkaWElM0IlMjBneXJvc2NvcGUlM0IlMjBwaWN0dXJlLWluLXBpY3R1cmUlMjIlMjBhbGxvd2Z1bGxzY3JlZW4lM0UlM0MlMkZpZnJhbWUlM0U=[/vc_raw_html][vc_column_text]What is cash flow in real estate investing?
Cash flow is usually associated with a rental property because of its ongoing cash flow.
What happens is when you are buying a rental property; you have to do a financial analysis that is going to determine whether the property will cash flow or not. The first thing you need to do is you want to analyze all the expenses as part of owning that property.
Now, this is where it gets tricky because a lot of people ignore certain expenses. The basic expenses are going to be your mortgage payments, your tax payments, your insurance payments.
Those are the three that you have to pay no matter what. Here’s where it gets tricky. A lot of people don’t put in any estimate for things like maintenance.
If you own a rental property, no matter where it is, no matter how new it is, you are going to have maintenance.
There are going to be some things that you are going to have to do with that property to maintain it, as a property owner.
The other thing is property management. A lot of people ignore that expense because they say: well, I am to manage that property myself. And that’s fine and good. Especially if you are only going to ever own three or four or five properties, you could probably do that property management yourself. But what it also means is if you don’t put any money in there that you are working for free.
Because any time that you spend going to that property you, you are not given it any value.
There is no way to expense that to your spreadsheet. It also makes your property look good because now it’s cash flowing.
The other thing you want to put in there is an allowance for the vacancy, no matter how good you are at finding tenants, no matter how good your tenants are, you will have some vacancy in your property at some point.
So those are the three different expenses that I see people leave out when they do a financial analysis. They grab the first three which is the mortgage payment, the tax payment, the insurance payment, and then they record that. Or they put that into their financial calculator, their financial analysis, but they just ignore the maintenance costs, the property management costs, and the vacancy costs. Once you put all those in, and then you have what I consider all the expenses required to own a rental property.
Now you look at that, compare the rents to that and you look at the difference between the rents minus those expenses. That’s what you have what’s called cash flow. Cash flow can be anywhere from $20 a door or even $200 a door. A door means per unit. The reason they say a door because sometimes there is more than one unit in the property.
You have single-family homes, you have a duplex and you have two doors on the property, a fourplex, you have four doors, apartment buildings have many doors. You could have, 10, 20, a hundred doors.
So make sure that your properties cash flow.
The other thing I see is people will say: well, it doesn’t cash flow right now, or I can’t find properties in this area to cash flow. They start tweaking the numbers to try to make it cash flow, or they say, well, the properties really appreciate in this area So I’m going to hold onto the property until it does cash flow. I would never do that.
I want you to make money on your properties the day you buy it.
You want to make sure it includes all your expenses and do due diligence on those expenses and make sure your property is cash flow right from the get go.
If you like what you heard and you want more information, how to get started with real estate investing or how to grow your portfolio really fast, go to invest.jimpellerin.com