Why Cash Flow is Paramount to a Real Estate Investment

The starting point for any investor making a real estate investment decision is a study of the overall market and supply and demand factors in specific cities and towns. Whether for speculative purposes or part of a long-term strategy, investors are never willing to engage in real estate investing unless the financial climate agrees.

As such, the bottom line for investors trying to decide whether to buy or hold boils down to their ability to analyze the health of a property’s cash flow, rental demand, and rent rates; because these will change over time for any income-producing property in any area and a prudent investor will want to stay on top of it.

The key element when analyzing rental property is the cash flow produced by the property (which simply stated is the difference between cash inflow and outflow). At all times any prudent investor engaged in real estate investing wants to know how well the investment is performing and subsequently whether it’s worth buying (or worth holding) based the climate of the property’s specific market.

Even if you accept the premise that rental property values will grow in value over time and will accumulate equity as you pay down the loan, you still need to be able to afford to hold onto the property. If the annual income you collect from the property, for example, does not cover the cash payments required running the property (i.e., mortgage payment and operating expenses) then you must decide whether you can afford to “feed” the property out of your personal budget as well as perhaps reduce your ability to invest capital in other markets.

Here are some questions you should ask and be convinced of when contending with negative cash flow. Is the situation temporary? Research the building trends, available financing, employment, demographic, and other economic trends in the area to determine whether they are positive or negative. How are market conditions going to change in the near future? Listen to the experts and try to quantify their predictions. Is market value growth exceeding negative cash flow? In other words, do you anticipate that the property value anticipated over time offsets having to feed the property and you can afford to wait it out?

When real estate investing, it always helps to find indicators that demonstrate a trend. If they are positive and appear promising (even in a slow market) then you might want to jump in, or in cases where you already are invested in a rental property you may wait out the market (if you can afford to); otherwise, don’t make the investment or (if you already own the property) it may be better to sell and cut your losses.

Here’s to your real estate investing success.