Updated August 27, 2021
Buying and owning a rental property is one of the best ways to make money in the US market. However, investing in just any property would not do the trick. You have to find a positive cash flow property to make money with real estate. If you, instead, end up with a negative cash flow property, you will be losing money, and that’s the one thing that no real estate investor ever wants.
So, how do you find positive cash flow rental properties in which to invest? It’s simple – just follow the steps outlined below.
Location determines each and every aspect of a real estate investment property, including the cash flow that it generates. Thus, the first step which you need to take is to do research to find a profitable market for rental properties. The key characteristics of such a location include a strong economy, a growing labor force, and high rental demand.
Moreover, you should look for a location with affordable property prices, as the price you pay for your property is one of the main determinants of your cash flow. It is also smart to look for a housing market where the price-to-rent ratio is not too high. While a high price-to-rent ratio is usually an indicator of strong rental demand, it actually decreases your chances of finding a positive cash flow property as the average property price level will be too high compared to the predominant rental rates.
Once you have located a profitable real estate market, it is time to move to the second and most exciting step on the road to owning a positive cash flow rental property: namely, the property search. You should use a wide variety of resources both online and offline. Look for “For Sale” signs in your neighborhood of choice; check out the local newspapers’ real estate sections; ask around for properties for sale, and visit websites with property listings.
Before you start all this, however, you should have your budget ready. Based on your savings and current income, decide on the maximum price you can afford to pay for an investment property without risking a default on your monthly mortgage payments and a consequent foreclosure. Then make sure that you only search for properties within your price range. You cannot achieve positive cash flow if you overspend on your rental.
After you’ve got an idea of what kind of property you will buy, it’s time to conduct a comparative market analysis. CMA is a must if you want to make sure that you pay a reasonable price for your investment property and end up with a positive cash flow. This real estate market analysis requires that you find a few properties similar to those you are considering buying, which were sold in the past couple of months. The sale prices of these properties will show you the fair market value of the property you want to buy.
Performing comparative market analysis, however, sounds like a daunting task, especially for first-time investors. This process can take days and even weeks, by which time your selected properties might be sold. This means that you will need to start the property search process from scratch, which will delay your making money from investing in real estate.
Alternatively, you can use some real estate investor tools such as a rental property calculator. This tool will provide you with readily available real estate comps and show you how many properties have sold in your neighborhood of choice. This will speed up your CMA and allow you to move on to the next step faster.
CMA is not the only real estate investment analysis you will need to conduct before buying a positive cash flow rental property. The next step in this process is investment property analysis. This means that you have to compare your property to similar rentals in your neighborhood. You can then figure out how much rent you should charge for the property.
You will also know what your recurrent expenses will be and what cash flow you will earn. Once again, such an analysis can take a while unless you use a rental property calculator. The tool will compare your property to actual rentals in the area in a matter of seconds. You are then provided with reliable estimates of the one-time and ongoing costs, the rental income, the cash on cash return, the cap rate, the occupancy rate, and last but not least, the cash flow.
The next step is the most obvious one – you have to buy an investment property to generate cash flow. During this step, you should keep in mind that it is recommended to work with an agent, especially if you are a first-time real estate investor.
A buyer’s agent will be able to negotiate the best possible terms on your behalf and secure a lower price than you can. The lower the price you pay for your rental, the higher the cash flow you will get from it. Moreover, you don’t have to worry about increasing your expenses as agents’ fees are paid by the seller.
The cash flow your property will provide does not depend only on the home you buy but also on how you run your business. Once you own an investment property, you have to decide how much rent to charge for it. On the one hand, the rent should be enough to cover your mortgage and other recurrent expenses while leaving you with positive cash flow at the end of the month. On the other hand, the rental rate should not be too high as this will push potential tenants away and leave you with vacant property. The investment property analysis you have conducted before buying the house will help in this regard. You should aim to set the rental price at about the neighborhood’s average for your type of property.
Of course, you can get creative in your rental property management and figure out a way to charge more than your competitors justifiably by providing a service they don’t. For example, you can offer weekly or biweekly cleaning of your long-term rental at a time agreed upon with the tenants.
If hiring a professional cleaning company costs you $200 a month, you can increase your rental rate by $220 as tenants would be happy to pay extra for the convenience of not having to do the cleaning on their own or not having to deal with a cleaning services company directly.
After you have been able to rent out your property to good tenants, you should put effort into keeping them happy. Your cash flow drops – and even becomes negative – every time you have to deal with a vacancy and a turnover. It shouldn’t take too much to retain your renters, while the efforts will definitely pay off.
Simply be friendly and understanding; check up on your tenants regularly without being intrusive; listen to your renters, provide for their reasonable demands; and maintain your property on time. Falling behind on any needed repair works will not only compromise your relationship with your tenants but will also result in an expensive renovation. Thus, you should inspect your property regularly at a time convenient for your renters and fix up any new issues right away.
The only way to make money from rental properties is to have a positive cash flow. This means that your rental income exceeds your expenses, leaving a profit for you to cash in every single month. While finding a positive cash flow investment property might sound challenging, it is feasible if you follow the steps outlined above.
About the Author: Daniela Andreevska is Marketing Director at Mashvisor, a real estate analytics tool that helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually three months now can take 15 minutes. We provide all the real estate information in easy-to-understand visualizations.