Making Money with a Cash Flowing Rental Property
February 12, 2013 | By admin |
Performing a cash flow analysis is critical when considering a large financial investment like a real estate rental property. The idea is simple enough; as with any business, the goal is to create more income than debt. The trick is to balance monthly maintenance costs and bills with profits to create a positive cash flowing rental property.
A wide variety of factors influence cash flow, though one of the biggest is the nature of the surrounding area. Lower housing prices generally mean positive cash flow but there is no universal one size fits all type of investment. Before looking at any property, take the time to do a thorough rental property investment analysis. Consider factors such as rent price, tenant utilization (how often the property is unoccupied), utility bills, repairs, and applicable taxes on the property.
The right rental property can be an ideal passive real estate investment requiring little time on your part. Of course, even a good cash flowing rental property will still take up your time and could be as demanding as any job you’ve ever had. Are you prepared to be a landlord? Be sure to learn as much as possible about the previous owner’s repairs: How much did they spend per year? What areas or appliances seem to need the most work? Will anything need replacing soon?
Establishing a cash flow real estate sometimes means having to make money off of a rental property or building even when it is unoccupied. It’s not ideal but must be considered. Research tenant utilization and be sure to factor vacancy and non-payment as risks based on previous trends and any data you can gather from other nearby buildings in a similar price range.
Averaging out past utility bills (including peak seasons during summer and winter) will be informative. In some cases, it may be wise to include some or all utilities in the monthly rent or it may be better pay the utilities yourself and divide the bill up among occupants.
The formula to establish a cash flowing rental is fairly straightforward:
Rent income – Vacancy Loss – Payments – Expenses = Cash Flow
Juggling the reality of these costs, however, is tougher than determining them on paper. Ample research is crucial to making the right investment for your budget and preferred management style. Maintaining a cash flowing rental property means being flexible and reevaluating each of these costs and profits on a regular basis.