Smart Real Estate Investments Start with Increased Cash Flow

After getting up in the morning and looking at the sky can we say for sure, whether or not it will rain today? Well, we can but actually, our predictions do not come true in most occasions. Similarly, while purchasing any real estate property, we expect it to undergo value appreciation but, exactly when that will occur remains unknown to us. Financial investments are drastically different from making loose predictions on trivialities of life. However, invariably 9 out of every 10 rookie investors end up purchasing a property based on the prediction of its cost appreciation. Thus, eventually, their initial ventures run into fiasco and they found themselves in a soup.

Rather emphasizing on value appreciation had they focused on the prospect of cash flow of those properties, they would have been benefitted. In fact, cost appreciation is certainly a significant reason to invest into the land and building sector. However, it is not the paramount factor that brings success to the investors. In order to make successful forays into realty industry, smart people always emphasize upon increasing the cash flow.

Appreciation of properties does not occur on a daily basis. It takes considerable time – at least six months to a year – for a building to undergo cost appreciation. If the market shrinks in the meanwhile, then it could even take much longer. On the other hand, investors require footing the maintenance bills and property tax bills for a building on regular basis. Thus, for real estate properties with negative cash flow, money keep draining out of the owner’s pocket even under normal circumstances.

In order to generate substantial cash flow at the beginning of every month, smart investors prefer investing in rental properties. As such, both single-family and multi-family homes are splendid options to enjoy the investment benefits. Now, suppose a multi-family home costs $1,00,000 and it has 10 units. Rent for each unit is $2,000 a month. Thus, the property generates a monthly income of ($2,000 × 10 =) $20,000. About 40 per cent of this income goes into the building maintenance and taxes. The owner is still left with ($20,000 - $8,000 =) $12,000.

This amount of $12,000 is the net income of the owner from the building, which adds to the individual’s cash flow. Now, one can conveniently repay the bank loan or at least a significant part of it from this additional cash flow. However, at times, a unit or two may remain vacant but those adversities are just part and parcel of any financial venture. Therefore, before investing into the real estate industry, smart people always emphasize upon the cash flow quotient of any building.