Cash flow is a key real estate indicator that is often used in real estate investing to help determine risk and value.
If real estate investors use cash flow, why wouldn’t you? After all, buying a home to live in is also an investment.
Cash flow is defined as the amount of money left over each month after all expenses and mortgage payments.
Gross Rental Income: $2,000/mo
- Expenses: $800/mo
- Mortgage: $1,000/mo
= Cash flow: $ 200/mo
Expenses can include Taxes, Insurance, HOA, Mello Roos, Management, etc.
Mortgage is the financing costs of the property based on the interest rate and down payment. Mortgage payment should not include taxes and insurance since you are already accounting for them in the expenses section. You are certainty welcome to impound your taxes and insurance and pay them along with your mortgage just make sure you don’t double count.
While there are other key real estate indicators you should take into account, cash flow is one of the most important.
Whether you are a homebuyer or a real estate investor, knowing if you can rent a home for your payments is important and can help bring a piece-of-mind.
If you were to lose your job, get relocated, expand your family, or experience any other major life event it helps to know if you don’t have the option of selling that you can turn the home into an investment property. Not only does this scenario help your retirement portfolio but can also help increase your chances of getting qualified to buy a new home.
Back in the real estate bubble investors were willing to sacrifice cash flow and earn negative cash flow in the hopes that the property would go up in value (appreciation). It is never a good idea to buy a property based on the potential for appreciation alone. Some say appreciation is a bonus. I’d go even further to say that appreciation is a gift for living in America. You don’t get appreciation if you live in some parts of the world. Be grateful for it and use it wisely.
Don’t make the same mistakes that your friends and neighbors did in 2005. Get educated at www.revestor.com and make your buying decisions based on quantifiable key real estate indicators.