Cash flow is the after tax net profit of a business. As the saying goes, cash is king. For a real estate investor, cash flow can make their property investment career a success or a failure.
Negative cash flow means there are more expenses going out than money coming in on investments. If the negative cash flow continues for too long and causes an investor to use all their savings, their business can end in bankruptcy.
Positive cash flow is more than making enough in rents to cover the mortgage note. An investor has to collect more than the mortgage payment to cover maintenance costs, homeowners insurance and taxes.
There is a formula novice investors should know when budgeting their cash flow. The first step is to figure out their gross income. Gross income is the estimated gross rent less house payment for vacant homes plus any other income.
The next step is to take the gross income less operating expenses to figure out the net income or cash flow before taxes. Add in the mortgage principal repaid less depreciation. This will show the taxable income, but once you subtract the taxes due or add taxes saved you will get your after tax cash flow. This is your net profit or cashflow.
Before investors buy a house, they need to estimate their cash flow. Joint venture (JV) deals can help increase an investor's cash flow by spreading risk. JV deals will cut into profit, but a smaller, safer profit is better than a risky investment.
Joint venture deals are a good option for real estate investors who may not be able to finance additional home purchases. Investors can pay a set interest rate for the loan of the capital money. An alternative is for investors to finance the purchase price of the home, the rehab costs and then the maintenance fees until the home is sold. The partner is responsible for negotiating the purchase price, the rehab work and selling the house quickly. This process is called flipping houses.
As a professional real estate investor, I have participated in many joint venture deals. I have written numerous articles based on my knowledge of the real estate investment business. I talk about relevant information affecting investors today. These articles are available at no charge in my cash flow articles library.
If you are an investor and haven't thought about cash flow, your business could be in trouble. When real estate investors lose sight of their budgets and cash flow problems develop, some investors lose everything. Don't end up with nothing to show in your investment portfolio. Read my articles to educate yourself before making an investment mistake.
Published on April 22, 2009 at 02:54 AM | Comments: 2