Every housing market is unique with different conditions for investors. Therefore, it is important to know if your housing market can generate positive cash flow for you as an investor. You need to do some research on your local housing market to know if it is indeed a right place to start as an investor.
Research on homes and monthly rents
To begin with positive cash flow is your net profit from a rental income property after deducting all expenses related with maintenance and the money paid to the lender as repayment. You need to begin by looking at types of properties available in your housing market. Do you find single family homes or there are also duplexes and apartment buildings? Once you have found the type of properties, try to find the monthly rentals of these properties. Different units with different numbers of bedrooms and bathrooms fetch different rental income. Check out average rental rates on realty websites like Zillow and Redfin. You can get first-hand information by calling numbers of homes that are listed for rent. You will be surprised to find a wide range of rents for some types of properties in your housing market. Do your homework to find why this range exists. Is it because of location, luxury, or looks?
Find out sale prices
To be able to buy the right property in right prices, you must be aware of median property prices of all types in your area. Check out asking prices of properties and the sale prices of properties in the last 6 months. You can take help of realty websites like Zillow and realtor.com in your exercise.
Do the math
Once you have knowledge of average monthly rentals and sale prices of properties, it becomes easy for you to calculate your profit as an investor. You must add up all costs and subtract them from your earnings to arrive at positive cash flow.
Monthly repayments to your lender- This money goes to repay your monthly obligations in the form of principal and interest payments
Expenses on repairs and maintenance- In addition to actual repairs, you will need to set aside 5% of monthly rental receipts for future repairs
Payments on insurance and property taxes- Talk to your insurance agent to know an estimate of the amount you will need to pay for the insurance of your property. Taxes are paid annually but you must be aware of them.
Not all units in your rental income property are occupied all the time. Remember this fact when calculating the cash flow from your property. On an average, nearly 10% vacancy rate is common in most housing markets.
If you find some money left after subtracting all expenses, you can consider it as your profit. It is also called as positive cash flow. If there is no positive cash flow, stay away from a property at its asking price. Try to negotiate with the owner to lower the asking price if you want it to fetch positive cash flow to you. You can also hope to create positive cash flow by reducing expenses on maintenance but there is a limit to the amount you can save in this fashion. After managing several properties, you learn how to generate positive cash flow by managing your expenses and bargaining with sellers on price.
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