As you have heard me say before, there are 7 different ways to profit from a single rental property. Most people know about 1-2, but do you know all 7 and are you taking advantage of them? This post will quickly explain the number 1 and by far the most important profit center in all of real estate: CASH FLOW.

This is a hotly debated topic in real estate world…or at least it was over the years. Lately though, more and more investors are agreeing that cash flow is king when it comes to rental properties. First, what is cash flow?

Cash flow is the money that is left over every month after ALL expenses are paid, including the vacancy and maintenance allowances, which are often left off of income and expense reports. Cash flow is money you get to spend on whatever you want. It is (hopefully) steady income that is produced each month from the carefully selected and well managed rental property.

Basic Example:

Income: $2000/month for renting a single family home

Expenses: property taxes ($200/month) + utilities ($200/month avg) + vacancy allowance ($167/month avg) + maintenance allowance ($167/month avg) + mortgage ($1000/month) + insurance ($70/month) = $1804/month.

Cash Flow = Income ($2000) – Expenses ($1804) = $196 of Cash Flow

That is a fairly average monthly cash flow for a self managed single family home. If you are not willing to manage the property yourself, a property management company will charge 5-10% of the monthly rent and that will be the end of the cash flow in this example. If the property is self managed, $196 is a safe amount of left over money (for a single family home) that also allows for some minor unpredictable expenses to pop up over the year without having the bank repossess the property. Larger properties with more units will require a larger cash flow in order to feel comfortable sleeping at night.

This is why cash is king. Investors at one time would buy properties with great anticipation that the market was going to heat up, or they heard the surrounding land was going to develop and increase property values all around. They would sell during the high and make a big profit. It worked for some people, but it failed for more people because each month they are LOSING money since the expenses are higher than the income. Also, what if the area doesn’t develop as expected? What if the market turns at the wrong time? There are so many variables in play. It is extremely dangerous to invest in rental properties, knowingly losing money every single month, with the goal to make money during the peak of the cycle….IF the property successfully sells. If one is able to accurately predict those events and have all the ducks align nicely in a row, they should play the stock market. I invest in rental properties because of the security and immediate cash, not on speculation of future gains.

Smart investors can make much more money over time by carefully selecting a property that will cash flow each month. They will use those profits and re-invest them back into the property, which increases the value of the property, or buy more properties. Obviously, it’s very difficult to grow a portfolio when cash flow is negative.

Takeaway – I will never buy a rental property that does not cash flow from month one. It’s simply not worth the risk and does not make any business sense.

Keep an eye out for future posts that go into more detail on how to improve and maximize cash flow on rental properties.

Also, please send me your comments or stories regarding cash flow. I read all of them and I may also feature your success story in future posts.

Mark