Alex Anderson
Investment Property Specialist

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What's The Deal With Cash Flow?

ANY investment property can cash-flow - it's true… Beginning real estate investors are commonly focused on cash-flow as the most important factor in buying investment property. But all too often, beginner investors aren't 100% clear on what cash-flow means to them.

Are you talking about the amount of money that's left over every month after you pay the mortgage? Great! That's a nice simple way, but it doesn't take into consideration any long term benefits OR long term expenses.

If you have a repair - or pay the city water bill 3 or 4 times a year - how do you measure your cash flow then? Do you say you positive cash flow "sometimes"?

Most likely you'll average it over a year then. That way you could add in ALL your expenses, whatever they may be, and ALL your cash-flow. But then, in one year, you will also have had the additional cash-flow come as a result of tax deductions, depreciation and other tax benefits. Great! That's just one more possible way of looking at, and defining what cash-flow means to you.

Here's another "sky-high" view of measuring - that you can try if you like: amortize your property over a decade.

That way you can figure in replacing all appliances every 10 years, some new paint inside and out, and any other repairs and expenses you might foresee. If you choose this point of view - often a little more revealing of all the details and reality in investing - you could also add in the actual appreciation at that point. Obviously homes are worth way more now than in the 90's… and then compared to the 80's, and so on!

So, when you are seeking your properties that cash-flow, be clear how YOU want to define that - especially with your lender who is your partner in making that happen! And if cash-flow is what you want, you can have it - you just need to be familiar with the structures to fulfill on that goal!

Do some properties make it easer to do than others? Yes. And what's the most simple way to determine those properties? Divide the monthly rent (or probable monthly rent) by the price of the unit. This ratio will measure a properties potential. The higher the number, the easier it is for you - or anyone - to cash-flow the unit.

But let's take a closer look at this whole cash flow concept…

What do you REALLY want when it comes to real estate investing? (or any investing for that matter)

Wealth? - Comfort? - Status? - Security? - A Legacy?

Getting just the monthly cash flow from your rental-properties doesn't necessarily mean that your money is working as hard as it could be for you. And that's why you'll find that intermediate or experienced investors are focused on all of the factors, including cash-flow, tax benefits, depreciation and appreciation.

Because of these different ways to look at the whole investing game, experienced investors know that just because a property isn't producing MONTHLY cash flow, doesn't mean that it can't kick butt!

Consider the following factors that influence an investors ability to get optimal lending and optimal benefit from their investments:

• How much money are you putting down on your property? (sometimes a property that won't cash flow at 5% down, can be made to cash flow at 10% down, for example)

• What is your credit score? (the higher it is, the better interest rates - and, consequently mortgage products - you have access to.)

• How is your debt-to-income ratio? (and is it considered "good debt" or "bad debt"?)

• What tax-bracket are you in? (determined by your income - average is 35%)

• How much equity do you have? (include your home, IRAs, 401Ks, etc. - this measures some of your 'leverage') 

• What type of mortgages do you like or feel comfortable with?

When I estimate cash flow on a property, it's based on an average person - at an average credit score - with an average interest rate - in an average tax bracket - paying average taxes - average operating expenses - using the most common mortgage product(s) used by investors …. and then a lower than average down payment (usually 10%).

Then people can see a fair estimate - or slightly lower-than-average cash flow scenario for themselves and customize it for their own scenario.

Your lender (if he/she is good) will have a far more detailed version based on YOUR numbers too. My numbers are basically "educated guesses" to help get people started before they talk to their lenders.

Author: Alex Anderson is a licensed RE/MAX Advantage-Plus agent. She specializes in helping people to build wealth and prepare for retirement by providing an education in real estate investing.