Spotting High Quality Cash-Flow Properties
Cash Flow Positive. That phrase has some panache for all investors. And for real estate investors, there’s always properties that will produce positive cash flow for many, many years. But just how do you find them?
It’s an easy process actually. The devil is later in the details where you assess their real cash flow value.
A key part of your rental income property investment strategy is your search to find positive cash flow properties wherever they exist. You can use the help of a Realtor who has access to the all important MLS, and you can search yourself on other property databases. A Realtor is a good asset and you’ll probably be using them to purchase anyway. They know local markets so establishing a relationship with one in the area is wise.
Check out this post on the best cities and this one on the overall rental market.
Read our post on which types of property are better first so you’re not searching aimlessly. You can own beautiful, rapidly appreciating, high priced properties in the favorite parts of your city and still find yourself with low yields and cash flow. Or you can source several apartments in one new building in an up and coming city and enjoy many more advantages.
Choosing the best properties in the best cities with the ideal cash flow potential is even more important than smart financing and choosing good tenants.
The Right Tools and Strategy
With the right tools and strategy, you can seriously improve the vital cash flow of your business. So whether you’re a landlord, property manager, realtor, or investor, “cash flow spotting” should be one of your top skills. And just by avoiding the stinkers, you can save yourself much pain.
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The best tools are cloud based property management software, or perhaps a spreadsheet if you’re still into that kind of stuff.
What we’re going to do here is look at the key factors and then build a strategy of finding the best cash flow properties. The UK, Australia, Canada and US property markets are unique. The best properties and cities could be difficult to find.
And if you’re renting out in shady neighborhoods to marginally employed low income tenants, cash flow is always in question. The solution is to know what your end goal is, and choose only the best houses or apartments that suit that goal. Be stubborn and focused.
Cash Flow Terms
Cash flow positive isn’t the same as profitability (which includes cap appreciation and tax writeoffs) and instead refers to the how the property itself produces revenue.
General Cash Flow Definition: Cash flow refers to the rent you collect via your properties minus the costs of operating and owning them.
Cash flow zone = (gross annual rental income / property price) × 100%. Those exceeding 10% will have positive cash flow.
As an example, with a 3 bedroom house priced at $300,000 you may charge $2,500 a month in rent. Now you divide the gross annual rent of $30,000 by the purchase price of $230,000, multiply it by 100 to arrive at a 10% cash flow zone.
Of course, there is the matter of expenses. 10% is perhaps the lowest cash flow zone if you want to do well in this business.
7 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 you’re 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. You’ll 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.
Be a geographic specialist and really get into what you’ve found to be the city with the best potential. Don’t run around like headless chicken.
Step 5: What can you charge? A Realtor can help you determine what you can charge for your unit. Check up on apartment rental prices across the US and in cities such as San Francisco, San Jose, Los Angeles, Toronto, UK, or Australia.
Step 6: What are the monthly costs? Use your favorite property management software, enter all the costs of owning and managing including:
- Property Inspection and appraisal
- Property survey
- Legal costs
- Repairs, renovations, and new appliances
- Land transfer tax and other property taxes
- landlord or property management company
- HOA fees
- mortgage premiums
Step 7: Talk to a Realtor. Find a Realtor who has experience in rental income property in the city you’ve found to have the optimal positive cash flow potential. Assess the properties and rent yield potential and what will be needed to have it attract the highest paying renter possible.
We recommend you use ManageCasa property management software to create your property files. By automating calculations of mortgages, property expenses, and income and being able to visualize it, it helps give you focus and saves you time.
As any top real estate person will tell you, being focused on your profit goals is most important.
See also: Property Management | Accounting Software for Rental Properties | Property Management Company Staffing | California Housing Market 2019 | UK Housing Market | Australia Housing Market | Toronto Housing Market | Toronto Condo Prices | Cloud Property Software | Multifamily Housing | Los Angeles Rent Prices | Online Rent Payment | How to Increase Rental Returns | Property Management Trends | Property Management Metrics | HOA Management Software | San Francisco Apartment Prices | New York Apartment Prices | Housing Market | Apartment Rental Prices | Best Cities for Rental Property | Grow Rental Yields | California Property Management