The three words every real estate investor wants to see or hear together are “positive cash flow.” The cash flow refers to the amount of money coming in, and when it’s positive, it means more is coming in than going out.
What Does Cash Flow Mean?
Money coming in over a continuous period is also one of the reasons that investors have found rental property ownership so attractive. It’s one of the few activities that generate a stream of income on an ongoing basis without requiring a constant need to generate new customers, or sell products day after day.
In real estate, people who buy distressed properties, rehab them and flip them don’t rely on cash flow, but instead are in it for the equity gains.
Positive cash flow in rental real estate comes from a number of sources, including:
- Deposits for security and cleaning
- Fees for applications, credit and background checks
- Unexpected gains from bounced check fees, late fees and surrendered deposits
These gains are offset by the expenses related to owning real estate that include:
- Monthly payments for PITI (principal, interest, taxes and insurance), HOA (homeowner association) fees, utilities, maintenance and repairs.
- Incidental costs related to property visits, marketing and management.
- Losses associated with weather, fires, theft, unforeseen vacancies, or accidents.
Although it’s not a given, the ability of a property to generate positive cash flow starts from the day it’s acquired. Ideally, buying low and renting high offers the greatest potential for building wealth through rentals.
Instead of leaving it to beginner’s luck, novice investors have found that turnkey property management groups provide them with the most lucrative opportunities. Selecting the best properties is as much a science as it is an art.
Since real estate is driven by local market conditions, it makes sense to rely on these experts who specialize in specific locations. Tapping into their knowledge speeds the learning curve and helps you sort out the niches that offer the best long-term potential for maximizing positive cash flow.
Staying on Top
Real estate is not static. Home prices change, rents go up and occasionally down, and sometimes neighborhood characteristics shift, as well. Besides experience with the market segments your property targets, paying attention to local conditions helps you establish fair rental rates.
Accounting and Cash Flow
Because the tax laws are favorable regarding rental housing ownership, it helps to understand how it’s treated. Your property manager or tax advisor can help you select the most beneficial approach. In general, you can approach cash flow for accounting purposes as cash or under an accrual system, as long as annual receipts are less than $5 million.
The cash system reflects exactly how much actual cash you have at any point in time. The accrual system is based on recording income and payments before they’re actually made. Someone can verbally commit to rent your home and when they do, you can treat that rent and all its deposits as cash, even though you haven’t received any money.
If you want an accurate reading of your business’s cash flow, the cash approach may work for you. On the other hand, if you exceed $5 million, you must use the accrual system. If you choose the accrual system, you’ll have to be careful that you don’t treat your paperwork balances as actual cash.
Cash Flow in Perspective
Cash flow is the lifeblood of any business, whether it’s a large corporation or a small real estate investor. Keeping it positive increases your income stream, which gives you more options for investing, or enhances your bottom line.
JWB has over 10 years experience managing turnkey rental property investments. We have a consistent approach that delivers steady cash flow from our clients investment properties. Curious what your cash flow could be from one of our rental properties? Try our cash flow calculator or contact us to learn more.