Understanding Cash vs Cash Flow in Real Estate Investment

By  |  0 Comments

Determining the cash flow is one of the most important tasks you have to do while investing in real estate. A necessary task in analyzing an income producing property is determining the before tax cash flow. When you know the cash flow, you can figure your return on your investment, calculate the tax shelter, and evaluate the investment, in other ways. You don`t need to be a real estate expert to determine a property`s cash flow, common sense and some uncomplicated research will provide you with a base figure. There are many steps involved in calculating a cash flow and they are as follows-

Step 1- figuring gross income

Step 2- vacancy and credit loss

Step 3- operating expenses

Step 4- net operating income

Step 5- debt service

Step 6- before tax cash flow

Everyone needs cash to live on a monthly basis and many people look to real estate investing to provide that cash flow and build long-term wealth. However, a lot of new investors buy the wrong properties and set things up the wrong way in their investing business. As a result, they struggle to make the monthly cash flow they need to supplement their income or even quit their jobs. To avoid this problem there are several ways a person can create cash flow-

  1. Buying positive cash flow rentals

This is self explanatory, but still many people buy negative cash flow properties. To do this right, following needs to be fulfilled-

  1. Buying at a discount

One should always buy a rental property at a price that provides a positive cash flow.

  1. Performing a full cash flow analysis
  2. Ensure proper property management

Once you’ve purchased the property, you need to manage your property closely to ensure it keeps producing positive cash flow

  1. Finding more ways to add value

Most real estate investors simply buy rental property and rent it out to tenants. But the savvy ones look for extra ways to create more cash flow from the same property, at little to no cost.

  1. Flip properties

It is another way to make cash flow. In this method you buy property at a low/discounted price, renovate it at your own ease, and sell it at a higher price, usually within a short time period. Because flips are so labor and time involving(even if hiring a contractor), it is recommended that you plan for only 1-2 of these per year while you’re building the rest of your real estate business.

  1. Offer a mortgage

If you’re trying to sell a property, perhaps a flip, rental property, or even your home, one way to create money is to offer vendor financing. Instead of taking all your profits as cash, you leave some in the property and loan it to the buyer in the form of a mortgage. The buyer must send you monthly payments (just like with a regular bank mortgage) and this provides you a steady monthly cash flow into your bank account.

So, above is all we need to know about cash flow. Although, instant cash from buying and selling real estate is a necessary tool for real estate investors, and it also is a tool that can produce some impressive profits. However, there is no real estate investor who got rich by flipping properties. It’s because once the property is sold and the profits are collected, the investment ceases to be an investment! The process should be repeated again and again to earn more. Long-term cash flow centers on the accumulation of income-producing assets, is a much stronger long-term approach that has made countless wealth for investors worldwide.

This is why cash flow should be your ultimate goal as a real estate investor. The best opportunities for cash flow lie within commercial apartments. Cash flowing properties are those properties which you keep as long-term investments, meaning that they not only provide income, but also help build significant asset value and wealth.