Cash Flow Property Definition
A cash flow property is a real estate investment that generates income or produces profits. A cash flow property provides an income stream or profit minus expenses.
It may also have the potential to provide rental income.Examples of cash flow properties include:
Commercial buildings Vacant land Foreclosures
Investing in cash flow properties is very important because it helps you build up equity in your home. Equity is money that you have invested into your home. You get paid back over time through rent payments when you invest in a property.
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Want to know more about rental properties and earning a positive net income? As the international marketing division of Vista land, Vistaland International is happy to provide OFW investors or OFW homebuyers with the knowledge they need to start earning from their real estate investments in the Philippines.
Vistaland International was primarily created to bring OFW closer to their dream of finally acquiring a home in the Philippines. And with the rising cost of living in the country, OFWs and their families are looking for ways to earn extra cash flow to support their daily needs. Luckily, you can also join the global network of Vistaland International as a real estate professional and earn a commission!
Vistaland International Marketing, Inc. is the international marketing division of Vista Land. Aiming to provide OFWs and migrant Filipinos a home in the Philippines, VIMI has established long-lasting relationships with brokers and clients around the world.
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How To Analyze Properties For Maximum Rental Cash Flow
While you may struggle to find a positive cash flow investment property in Toronto, there are ways to approach your investment and finding a good rental property that will serve to reduce your margins as you build equity. Your real estate agent will be your best advocate in sourcing your investment properties, whether in the pre-construction market or the resale market, that will better your bottom line.
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Positive Cash Flow Vs Positive Gearing Explained
Although it sounds similar, positive gearing is slightly different to positive cash flow.
|Positive cash flow property
|Relies on depreciation and tax deductions to exceed expenses
|Rental income alone exceeds expenses
Importantly, both produce a cash surplus .
And as rents increase over time, your positive cash flow property is likely to become a positive geared property, giving you an even larger yearly cash surplus .
Where To Find The Optimal Positive Cash Flow For Investment Property
Cash flow is the sum of money left over at the end of the day . While that might sound manageable enough, finding good cash flow property isnt quite as simple as it might seem.
Some investment property can produce negative cash flow, which means you will need to contribute money out of your account every month. This could work if your strategy is to focus on capital gain. You will also need a strong finance to support the carrying cost and risk in the case of vacancy, job/income loss, or market downturn.
There are two chief ways that rental property investors make money:
- Cash flow left over after receiving tenant rent and paying expenses out of that rental income
- Appreciation in market value over the long term
Cash flow property is rental real estate that offers a higher level of cash returns than comparable property and normally a lower level of appreciation.
In a way, investing in cash flow property is comparable to owning dividend-paying stock. The higher the level of net cash flow you earn, the more money you will have to reinvest, and the quicker you will be able to pay off the mortgage and increase your real estate portfolio.
How to Ascertain and Analyze Cash Flow Property
1. Concentrate on cash flow real estate markets
2. Value property depending on cash flow calculations
3. Prepare a CMA to know rents and competition
4. Apply a Pro-forma to itemize income and expenses
5. Set fair market rents
6. Remember, good tenants are difficult to come by
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Q: How Did You Find This Investment Property
Ive been researching not only surrounding areas of Sydney, but also out of state major regional towns. This one came up in an online search. After running some quick back of envelope numbers, I decided it was worth investigating more. So I went there to have a look and do some more research on the area.
How Do You Calculate If A Rental Property Is Worth It
To calculate if a rental property is worth buying, you need to consider several factors. First and foremost, you need to know the rental propertys ROI. ROI or known as Return on Investment is a good way to measure if a rental property is profitable or not. To calculate the ROI, you need to take the total net profit or net gain and divide it by the original cost.
ROI = Gain on Investment Cost of Investment Cost of Investment
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Our Value Proposition To You
At Positive Cashflow Investment Property we offer our clients what we believe are outstanding property investments. We have searched far and wide and these are the best we can find:
- Dual income, positive cashflow packages only.
- Best rental returns in Australia for a non mining city market. Our properties are currently showing high yields and are cash flow positive to the tune of $300 pw depending on tax bracket and mortgage interest rate.
- 10 minutes to patrolled surf beach.
- Low vacancy rate.
Tip#: Know Your Marketing Strategy
Yourproperty will not always be 100% occupied. It’s important that you know how tomarket your property should it become vacant.
Your marketing strategy needs to be effective, as a vacant propertycan quickly eat into your cash flow. Before purchasing a property make sure youhave a detailed marketing strategy in place.
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The Next Steps Of Investing In Positive Cash Flow Property
While this is just a guide to investing in positive cash flow property, the real education comes from connecting with a property mentor or coach.
At Positive Real Estate we have the know-how and the proven experience at finding cash flow positive investment properties around Australia.
We also have the best tips on avoiding negative cash flow properties which we share through our free real estate investing seminars along with our advice on the best markets to invest in, how to get started in investing, and how to invest with minimal risk.
Why Equity Is Paramount To Rental Cash Flow
When approaching the economics of a finding a good rental property, you always want to have a long term vision. Sure, the rental cash flow is a nice bonus, but in a market like Toronto, you make the most by investing wisely and building equity.
Lets say you own a rental property that cost you $600,000. When you put all of your expenses into your investment property calculator monthly mortgage, property taxes and insurance, condo fees, etc and deduct that from your rental income, lets say you actually lose $300 a month to carry that rental property. Seems crazy right?
But what if I told you at the end of that year youll have actually earned 5% in equity on your property? So while on paper you may have lost $3,600, in the grand scheme of things your propertys value went up and earned you $30,000. Meanwhile someone else is paying down the principal on your mortgage and that negative cash flow can also be written off against your capital gains.
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The Most Common Rental Property Cash Flow Detractors
One of the most important steps when calculating cash flow is to estimate the expenses that your investment will have. To accurately break down expenses, you need to be aware of every potential cost. Overlooking even one of these items can change the bottom line cash flow of your rental property.
Below are some of the most commonly ignored monthly rental property expenses:
Pros And Cons Of Positive Cash Flow Investments
The positive cash flow property investment strategy involves seeking out properties where monthly income exceeds holding costs.
This will generate surplus cash flow for you pre-tax.
Positive cash flowinvesting is generally contrasted with negative gearing, where the income returns do not offset holding costs, and the investor uses the tax treatment of the loses to their advantage.
Proponents of the positive cash flow strategy point to the advantages of owning income-generating assets, including having access to an extra income stream month to month.
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Why You Should Hunt Down Positive Cashflow Property For Sale
Positive geared investments mean that all costs are covered by any rent, and theres still money left to spare. As with all real estate, it pays to be careful some agents advertise that a property is Positive Cashflow, when in reality it is negatively geared and only becomes the former after tax deductions have been made. If you are trying to find a positive cashflow property for sale on the market, its best to seek help from a reputable advisory company such as Positive Real Estate.
The benefits of cash flow positive property are clear in terms of your investment strategy. The house essentially pays for itself with money left over. These types of real estate opportunities increase your serviceability, making you more attractive to banks and lenders. In short, if you can find the right investment property and increase your income, you are able to borrow more.
If you want to balance your portfolio, the extra income from these types of real estate opportunities can be used to cover any shortfall you may experience due to the costs of holding high capital growth properties.
Simple Steps To Finding Your Prized High Cash Flow Properties
Step 1: What are your profit goals? Not long ago real estate investors were getting 30 to 40% ROI on investments, however that was mostly from flipping. From rental income properties, you should shoot for 20% profit.
Buy the right cash flow positive properties and do your tenant acquisition professionally and you can get 20%.
If youre smart, you can do it. The standard is supposedly 8% to 10% yields. Buy the right properties and do your tenant acquisition professionally and you can get 20%. 20% is an nice yearly income when your portfolio is $300k and is pure joy when you have a portfolio of $3M to $20M.
Step 2: How much can you afford? A budget of $2M can help you buy a good number of quality apartments. In the right up and coming cities, your cash flow will grow and you might see some good capital appreciation too.
Step 3: Find the Right Properties. As we discussed in the how to find the right rental property post, 2 bedrooms seem to be in demand. So although you love the 4 bedroom gem, the price to rent ratio is likely too high.
Step 4: Find the Right Properties in the Right Cities. See the post on the best cities to buy property and one discussing rental yields. Youll get a start on finding the best cities and specific neighborhoods where properties are still affordable and which will have future demand from renters. They might be near new factories, urban areas, or transit lines.
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Properties That Have Been On The Market For A Long Time:
I love this picture because it perfectly symbolised what happens when a property has been on the market for a long time.
Sellers often start out highly optimistic about the price they can sell their property for. Then when the market doesnât take a bite of the cherry they lower their price and expectations.
If a property stays on the market long enough you have the opportunity to secure it for well below the market value.
The key is that you have NO IDEA what the sellerâs financial situation is. If they are in a weak financial position and need the money then you could get a low ball offer accepted.
Most properties in popular areas donât stay on the market for long. But the less desirable properties can stay on the market for quite a long time.
However, if there is rental demand in the area and you price your rental correctly you could have it rented out for a high rental yield quite quickly.
The biggest thing to be aware of is that if it took a long time to sell when you bought it, it will also likely take a long time to sell when you want to get rid of it.
What Is A Positive Cash Flow Investment Property
However, the caveat is that this only applies AFTER tax. See there is a difference between a positively geared property and a positive cash flow property.
A positively geared property gives you, the investor, extra income each week as the rent is paid , while a positive cash flow property might generate a loss but then after tax returns are lodged you end up with more money in your pocket.
As explained by On Property, properties with high depreciation options have the greatest potential to be in positive cash flow. This is because their on-paper loss allows you to claim more of your tax refund.
However, older cheaper properties can offer a strong rental return and therefore are more likely to be positively geared. So it kind of works out for you both ways depending on when you need that additional cash flow.
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Top 7 Risks And Pitfalls To Avoid
Positive Cash Flow Property can be a lucrative strategy for investors, but like all property investment strategies, how you execute is also critically important.
Buying the wrong type of positive cash flow property is worse than not investing at all. Here are a few of the risks and traps to watch out for:
What Is The 2% Rule In Real Estate
The 2% rule is a term used to determine whether or not the rental property results in a positive net profit. Basically, the 2% rule states if a propertys monthly rent is at least 2% of the sale price, then it is likely to provide a positive cash flow for the real estate investor.
The formula is: monthly rent/purchase price = X
For example, an OFW investor purchases a house and lot in the Philippines for 2 million pesos. In order to reach the 2% rule, their asking rental price would be Php 40,000/month. By determining if their rental property falls below the 2% rule, they can determine if the rental property is likely to have cash flow or not.
Here are a couple of investment property strategies you can use:
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What Are Positive Cash Flow Properties
In order for us to explain what positive cash flow means, it is important that we explain the concept of cash flow first. So, lets suppose you invest in rental properties that produce a monthly rental income of $1500. From that sum, we deduct all the expenses associated with that rental property. So, if we suppose that the amount of monthly rental expenses adds up to $600 each month, you are left with $900 for your own pocket.
Now, the $900 is what we call the cash flow. Since the figure is positive, it means that your rental property is a positive cash flow property. Hence, it is the best investment property you could put your hands on. On the other hand, lets suppose your rental expenses exceed the $1500 rental income you receive. You will be left with a negative figure, therefore, making it a negative cash flow property.
Dual Living Houses And Duplexes
Dual living homes are cleverly designed to look like a single dwelling from the streetscape but have two separate properties under the one roof. One side is typically three or four bedrooms and the other side two bedrooms. These properties are only permissible in certain council areas, provided the land exceeds a pre-determined minimum size.
They are showing gross yields from 4.50% to 6% pa. Priced from around $500k to $750k+, they include brick and tile construction, fully fenced, turf and landscaping and covered outdoor alfresco area. They are popular with tenants as the price point is lower than other rental properties, and they are brand new.
Rather than just settling for a single income property investment, you can easily generate two incomes from dual living houses and duplexes. Some of the other advantages that these dual income properties offer include:
- Low outgoings no strata fees and low council and water rates
- Maximum depreciation allowances because the properties are brand new
- Total rent return that is around 50% higher than single-dwelling houses of similar value
- Location in high rent demand areas
- Lower vacancy risk than single-dwelling properties as one side would still produce income
- Typical configuration is three-bed + two-bed
The floor plan of a typical dual living property above.