Real estate is a varied industry. While it is one of the top-ranking investment avenues in terms of minimized risk and inflation avoidance, there are many different routes one can take when investing in real estate properties. Whether you buy and hold to create a cash flow or you flip and sell to make a quick lump sum, real estate is a great pathway to create a solid financial future.
When it comes to real estate investing, investing in cash flow properties seems to be the most popular. Despite many television shows depicting the get-rich-quick scenarios presented by flip and sell properties, investing in cash flow is often the best way to secure a sound income with a more passive take. Cash flow properties are generally properties which generate a set monthly revenue for the owner. This cash flow is determined after expenses, such as mortgage, taxes, and so forth, have been paid out.
Investing in such properties can be tricky for those who haven’t had previous experience in the investment industry. There are numerous factors and figures which have to be evaluated and analyzed in order to purchase a property that would make a sound investment and offer an acceptable monthly cash flow. While it may seem daunting at first look, there are ways to invest in cash flow properties the right way, which will help you avoid any unnecessary mishaps.
Setting Investment Goals for Investment Properties
Unlike purchasing a home for residential use, when purchasing a home for investment purposes, you have to already possess a clear understanding of what you are looking to get out of the purchase. Just looking at homes that catch your eye, like you would with a residential purchase, will not result in finding the best deal for your money, but rather will waste your time and frustrate you. In order to find an adequate investment property, you have to have guidelines when beginning your search. Setting your investment goals prior to searching for a property will allow you to understand these guidelines.
One of the biggest things to understand is what you are looking for in cash flow as this rate can help you narrow down the market in which you need to be looking in. Keep in mind that a return on investment (cash on cash) is different than your monthly cash flow. Most people find themselves with ROI rates between 6-10%, with a goal of 10-15%. Even with these higher ROI rates, the monthly cash flow—the money left over after all of the property expenses are factored in—only ends up being between $100-250 a month.
How to Find the Right Cash Flow Properties
Finding the right cash flow property may seem daunting, but with enough due diligence it can be fairly easy. Once you have your goals in mind, then you can locate a market which meets your investment aims and begin searching. From there, you can narrow down properties by analyzing a few key features—location, condition, and numbers.
Look for a property that is showing a proven track record for cash flow rentals. You’ll want to invest in areas which have a steady economic and job growth, as well as a substantial rental demand. Neighborhoods with low crime rates, good school zones, and are close to amenities such as transportation, shopping, and hospitals are better for rental property investments. Condition is key, too. Regardless of how cheap the purchase price is, severe renovations and repairs have to be factored into the cash flow equation, so you don’t want a property that is going to take too much work to meet all city codes and tenant/landlord laws. Of course, the final numbers are also important to evaluate. Keep in mind how much property taxes, insurances, and any HOA fees will add to the mortgage price. These all have to be factored into your equations, too.
Noting Down Risks Associated with Cash Flow Properties
When coming up with your goals and cost equations, there are a few things you need to take into account. Cash flow properties are great investments, but they are not without risks. Calculating and budgeting for these risks can help you avoid any financial troubles if they do arise, while padding your bank accounts in the event that they do not occur. Always go into a situation with your eyes wide open and well aware of what is to come, especially when you’re dealing with such large amounts of money.
Risks for cash flow properties include rental vacancies, management problems, non-paying tenants, unexpected maintenance bills, rent value decreases, fire or other natural disasters, and other similar situations.
Staying Up-To-Date by Educating Yourself
During the entire process of investing in a cash flow property, research and education is the key. It is important to understand the market—both the national and specific market in which you are investing. It is vital to be aware of the risks that can occur and know the high-end cost equation. These are all factors which you need to know before you invest, but the research and education doesn’t end there. Even after you purchase, you need to stay up to date on the market trends, the rental laws, and costs. Without staying educated, you are likely to make uninformed decisions regarding the property which can cost you big time down the road.
Cash flow properties are a great way to invest in financial security down the road while adding a respectable monthly cash flow to your income in the process. As with any investment, cash flow properties do come with their own risk leverage, however, be aware of these risks going in will allow you to make informed, smart decisions that benefit your investment portfolio for the future to come.