Real estate investment is a business. To be successful at it you need to be aware of the four advantages of real estate and how to use it to maximize your business success. These benefits are:
1. Cash flow
2. Equity build up (the payoff of your loan)
3. Tax rewards
4. Appreciation
This article we’ll be looking at the criteria number one. Profit number one – Cash flow. Real Estate is mainly about numbers.
If you play the game right and well, first you need to understand the numbers and how to control the numbers to get the results you want to get. The results being cash flow.
The formula the calculate your cash flow income is:
Gross Rental Income
Minus: Vacancy rate
Equals: Adjusted Gross Income
Minus: Operating costs
Equals: Net Operating Income
Minus: Debt Service Payments
(mortgage)
Equals: Cash Flow Before Taxes
With the quick explanation of the method above, here is your next step to generate more passive income and cash flow. Two ways to do this. Either gets more rental income by increasing the amount of rent and/or dropping down the vacancies rates or dropping down your operating costs and/or the Debt Service Payments.
If you are investing in a rental home, it obvious that by paying less for the property would mean that your loan should be less, therefore your loan payments should be less and should give you more cash flow.
Before you buy any real estate rental investment type property for cash flow, is very important you run the numbers using three separate scenarios.
The best option is the rental rates are high and low operating expenses; the worst option is your rentals rates are low and expenses are high, and then have the option of the average option. If the worst option you calculated still make sense to you and make a decent amount of cash flow per month, it should be clear to you to go into to invest in this home.
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