Achieving Positive Cash Flow

[Tom Napiontek]

One of the things I hear most often, especially in today’s market, is how uneasy prospective investors are about getting into real estate. They are worried about market fluctuations and the possibility of depreciating value. Just like with any investment, real estate is a risk; but it’s a risk that historically has proven its worth time and again. And, it’s my belief there is no time like the present to dive in head-first and get some of those gem properties that are the result of the recent market upset.

However, especially if you are a first-time investor, I feel it necessary to impart some wisdom that comes only from long-term industry and personal experience. It’s advice that will help ensure you are able to get the greatest benefit from your investment—positive cash flow.

It’s not uncommon for someone to tell you that you need to pay as much of a down payment possible on an investment property so you can recognize the lowest monthly mortgage payment possible and bank the highest amount of rental revenue. And, while this seems to make sense, it’s a flawed approach.

When you take all the cash you have and turn it over for the down payment, you’ve depleted or eliminated your cash fund that should be used for emergencies, repairs and the like. It is also going to take you longer to realize real profit. Extra cash, however, can also be used for other investments to add to your portfolio, further diversifying it and increasing your chances for a greater income stream.

So, the best approach is to secure a low rate interest loan. You will then want to determine how much you can realistically make from the property in monthly rent.  You will also need to take into consideration the operating costs for the property, which can usually be assumed at three months’ rent annually. Once you know these numbers, you’ll have a reliable formula to determine how much you’ll need to pay for a down payment in order to turn a profit.

You can always play with the formula and tweak the three main components (decrease expenses, increase rent, increase or decrease down payment) to achieve the best possible scenario for your individual property.