Buy & Hold Investments: Cash Flow Makes The World Go Round

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Not all real estate investments are created equal. If new investors can get a deal at a good enough price, they will figure out what to do with it after the fact. What they will quickly realize is that if they intend to hold onto the property, they will need to show positive cash flow every month. While this may seem obvious, oftentimes this is overlooked in favor of the property itself. You can have the nicest property in the area, but if the numbers don’t make sense you will quickly regret the purchase. Before you buy any long term hold property, you need to check the cash flow.

Cash flow is rental income minus expenses. Not every higher priced property will demand higher rental income. You have to evaluate every property on its on merit and look at comparable rent schedules and see what is on the market. If your expenses exceed what you bring in, you will have to pay the difference every month and quickly sour on the property. If the property does not make you money monthly and you have to wait on appreciation, you may be waiting a very long time.

A common mistake investors make is the miscalculation of expenses. Mortgage or loan repayment, taxes and insurance are the core expenses, but there are many more to consider. Utilities, water or sewer bills, property management fees, lawn care and snow removal all have to be included in the monthly expense chart. You would also be wise to add a vacancy factor and a reserve fund in the event repairs are needed or there is a short term vacancy. If you overlook any one of these expenses, it will change the way you think about the property.

If you thought you were cash flowing $400 a month and with added expenses that number drops to $150, it suddenly makes the investment seem shaky. The risk and reward from lease to lease is not where it was at the previous number and makes you question the investment. Also, many of these numbers are not constant and can change from year to year. If you are low-balling these estimates and if there is a change in rent or the taxes increase, it will turn a positive cash flowing property into a negative one almost overnight. Use the worst case scenario with every expense to see what the conservative bottom line will be.

After looking at all of the numbers, you will see that not every property is as good on paper as what you would think. This should also open your eyes that some properties will cash flow for much more than you may have thought in areas that are not as strong. Take each property separately and look at the big picture. If you are hoping on appreciation, you may be waiting a very long time for something that will not have a great impact down the road. Holding property and renting it for the long term is a great strategy, but you will always need cash flow to make that work. Cash flow is king in the rental world.