What Does Cash Flow Mean?
The words “positive cash flow” are music to real estate investor’s ears. Cash flow is the amount of money that is coming in. When the number is positive, the money that is coming in is more than what is going out. Money continuously flowing in is one of the reasons why real estate is so attractive to investors.
Real estate investing is among the few investments that offer a steady stream of income without having to sell products or look for new customers. Flippers (those who buy damaged houses, renovate and resell them) do not depend on cash flow but equity gain. In rental real estate, there are several sources of positive cash flow including:
- Deposits for cleaning and security
- Rent
- Unexpected gains from surrendered deposits, late fees, and check fees
- Fees for background and credit checks
Expenses associated with owning real estate properties often offset these gains. They include:
- Monthly payments for HOA (homeowner association) fees, maintenance, repairs, utilities and PITI (principle, interest, taxes and insurance)
- Losses due to unforeseen vacancies, accidents, theft, fires or weather
- Incidental costs from property visits, management and marketing
It is not a guarantee, but a property can start generating positive cash flow on the day you acquire it. The greatest way to build wealth in rental real estate is to buy low and rent high. Newbie investors no longer rely on beginner’s luck. They have opted for turnkey property management groups for lucrative opportunities.
Choosing the best properties is both an art and science. Local market conditions affect real estate and so it is wise to consult with experts of specific locations. Acquire as much knowledge as you can from them so you can learn the most suitable way to increase your cash flow. Home prices change and so does rent and neighborhood characteristics.
In addition to being experienced with the target market of your property, you need to monitor the local conditions, so you can set fair rental rates. Tax laws favor rental housing ownership so try and understand how everything works. Your tax advisor or property manager can guide you on the best approach. There are two approaches; accrual and cash system (provided the annual receipts are not more than $5 million). The accrual system involves recording payments and income before they are made. You can commit a verbal commitment to pay rent as cash.
The cash system shows the actual amount of cash you have at a certain time. The cash approach works best if you want the reading of your cash flow to be accurate. If you are above $5 million you have to use the accrual approach. With the accrual system, you should be careful not to treat paperwork balances as cash. Cash flow is an essential component of any company or business, from small real estate investors to large corporations. If you keep it positive your income stream will increase, and you will, in turn, have more investment options.
