Cash Flow in Real Estate
Cash flow is essentially the money that you put into your pocket after all expenses have been paid on a property.
Some examples of expenses would include taxes, utilities paid by landlord, maintenance expenses. One of best benefits in owning investment properties is cash flow. While investment properties can appreciate in value, cash flow is another benefit when owning real estate that is looked at when considering to purchase real estate.
Finding out what real estate cash flow a property makes is pretty easy to do, but its important to look ateverything in order to see what the cash flow really is. You may ask how to calculate cash flow on a property. To calculate cash flow what you'll want to do is:
1) Add up all the money the property produces. (Rent + Extras)
2) Add up all expenses of the property. (Taxes, Utilities paid by Landlord, maintenance expenses, etc.)
3) Subtract the total of #2 from the total of #1 to get your cash flow. If the property takes in more than it gives out then the property has a positive cash flow. If the property gives out more than it takes in then the property has a negative cash flow.
A positive cash flow is a good thing, but a negative cash flow, while it sounds terrible, may not be so bad when taking into account the benefit of appreciation. See real estate appreciation for the reason why.
Investors generally look for a 1% return on their property. For instance, say there is a single family house that produces $1000 a month. That house, if put on the market, would likely sell for $100,000. You can simply add two zeros to the amount of the rent in order to get a good price to buy the property for.
An important rule to keep in mind though is to make sure that the expenses are in line. If the tenants pay for all the utilities then this could be a good deal, but if the landlord pays all of the utilities then this could be a property that will end up with a negative cash flow.
