Cash Flow is Key to Choosing an Investment Property

The most important metric when deciding to purchase a rental property is CASH FLOW!

Many, if not all of the other metrics assist in deciding which property to invest in, but cash flow will create profitability in the short and long term.

The Webster Dictionary defines Cash Flow as:

1. A measure of an organization's liquidity that usually consists of net income after taxes plus noncash charges against income

2. A flow of cash

Maxfield Home Solutions defines Cash Flow as:

1. A measurement of income which accounts for all costs, both real and estimated expenses.

Types of Cash Flow

Estimated Annual and Monthly - Budgetary measurement used to evaluate a possible investment prior to purchase.

Actual Annual and Monthly - Investor measurement used to evaluate an investment with a years worth of data.

The cash flow formula is very simple:

Annual Gross Rent - All monthly and annual expenses = Annual Cash Flow

Examples of Expenses:

• Income Tax

• Property Tax

• Estimated or Actual Vacancy

• Estimated or Actual Maintenance

• Mortgage Payment

• Management Fee

• Advertising Fee

• Utilities

• Yard Maintenance

• Cleaning Fees

• Property updates

The following reasons display why Cash Flow is the most important (but not only) key factor when purchasing a rental property.

Risk Aversion

When a rental proper

ty produces more income than expense an owner can build a reserve for rainy days. As a property owner, rainy days come in many forms; vacancy, HOA assessment, unexpected repairs and destructive tenants. A reserve should include at minimum 6 months of operating expenses plus 3% of the property value. However a general practice for increased safety is 6 months of rent plus 3% of the property value.

For example, if a property is valued at $150,000 and rents for $1,300 per month a proper reserve will include ($1,300 x 6) + (3% x $150,000) = $12,300. The reserve reduces the owners risk. All investments whether they are in property, securities or metals should PLAN FOR PROBLEMS and CELEBRATE SUCCESS.

Investors will earn more money every year with properties that cashflow, which adds to the properties Return On Investment (ROI).

Passive Income

Everyone dreams of winning the lottery and receiving a monthly salary that continues on for eternity. Income producing properties that cash flow will fulfill your wildest dreams. Many people retire at a young age on income produced by their rental properties. A passive income means that someone else will manage the property while you manage your free time.

Growth

On average properties in the United States appreciate by 3-5% annually. According to Zillow, from August 2019 to August 2020 property values increased by 5.1% across the nation. According to businesswire the average home increased by 7.8% in the first 7 months of 2020. Even in hard times properties can appreciate in value. Long term appreciation is very important too. Today, in Cocoa, Florida the average home value is $235,000, in 30 years at 3% appreciation, a $235,000 value home will be worth $570,000 or $740,000 at 4% appreciation (Michael Bluejay).

Rental properties are great investments. Very few investments offer both growth and income. As a retiree or a young professional, investment properties are one of the safest investments.

If you are interested in increasing your passive income or would like to increase your investment portfolio contact me at (321) 423 - 8283 or Adam@MaxfieldHomeSolutions.com.

Written by:

Adam Maxfield

Realtor

Keller Williams Space Coast Realty

(321) 423-8283

Adam@MaxfieldHomeSolutions.com