Cashflow - Why Investors Need It
Positive cashflow is one of the most important aspects of real estate investing. Whether buying, selling, trading, or renting properties it is crucial to keep expenses to a minimum to produce profits. Otherwise, properties will become money pits and investors will end up spending more than they earn.
Finding properties that produce positive cashflow can be tricky, especially in today's real estate market. Although there are plenty of great deals, there's much more to investing than locating cheap homes for sale.
Many investors are turning to bank owned homes because these properties are usually priced below market value. While this can be a good strategy, investors need to carefully weigh the pros and cons.
The majority of bank foreclosures require repairs. When property owners are struggling to pay mortgage installments they don't have extra cash for basic repairs, let alone major renovations. Just because a house is listed below market value doesn't make it a smart investment.
Investors must conduct due diligence and acquire repair estimates to determine the actual cost of the property. Another consideration is the length of time required to return the home to livable condition. If property repairs extend for several months investors will lose out on cashflow that could be generated from rental income or selling the home.
Investors also need to determine how the property will be used to produce cashflow. Houses can be sold, rented, or traded using 1031 exchanges. Using 1031 exchanges is a good approach for reducing capital gains tax, but does require hiring a Qualified Intermediary to oversee the transaction.
Although selling houses has become more challenging, there are still people interested in buying houses. Investors can offer homes for sale in traditional fashion or engage in creative financing options such as owner will carry and lease purchase options.
Using creative financing can produce better cashflow than selling properties outright as long as the deal is constructed properly. People that buy houses using seller-financing and lease purchase option agreements oftentimes can't qualify for conventional bank loans.
Entering into unconventional financing methods can help them restore FICO scores so they can qualify for a mortgage note within a few years. Buyers are usually more willing to pay the full asking price in exchange for having the seller carry all or part of the financing until they can obtain bank financing.
Furthermore, buyers are more likely to take good care of homes when they are working toward purchasing it. This can improve cashflow for investors because tenants aren't going to move out in the middle of the night or fail to pay rental payments.
Even in the worst case scenario, investors don't have as much financial risk if tenants do vacate the premises. When lease options are used, tenants provide a down payment to secure the home. If they unexpectedly move, investors can keep the down payment because tenants have defaulted on the contract.
The majority of real estate investors that use seller carry back trust deeds don't offer full financing. Instead, they carry back a portion of the purchase price and require buyers to obtain bank financing for the balance.
These are just a few ways for investors to produce positive cashflow in a volatile market. We invite you to learn more about creative financing options and additional methods for generating cashflow with real estate notes and land contracts in our real estate investing article library.
Published on January 20, 2012 at 02:51 PM