The Well Informed Investor : Part 3: How to Find Properties That Cash Flow

Posted on 10. Nov, 2011 by in General

The previous two blog posts focused on the foundation level of real estate investing. Every serious investor should get the foundations right and build their business on solid ground.  Assuming that you have identified the economically strong areas to invest, you are now going to focus on one or two areas to get to know very well.

Investing in real estate takes an enormous amount of research to do properly, don’t just buy anywhere you find a deal.  There’s often a valid reason why a property is being sold cheaply.  You job is to get to know the profitable areas inside out.  By becoming a geographic specialist you will ultimately save yourself time and money, as each time a property comes on the market, if it’s in your target zone you’ll already know:

  • the tenant profile of the area
  • typical rents
  • property taxes
  • average property management costs.

Knowing this valuable information will free up your time, resulting in your ability to make deals faster and confidently.  You’ll start to identify a winning deal from a no-deal very quickly.

OK, so you’ve identified a property in an area with a great future and you want to find out whether it has potential. You want to know, at a glance if it cash flows.  Here’s an easy formula to use to help take the guesswork and emotions out of the investment analysis:

(gross annual rent/purchase price) x 100 = cash flow percentage

For example: The property you are looking at has a price tag of $250,000 and you know similar rents in the area are $2,000 per month. You”ll divide the gross annual rents ($2,000 x 12 = $24,000) by the purchase price ($250,000) and times that by 100 = 9.6%

Any property that falls between 8 and 10 per cent is likely to generate positive cash flow.  Any property over 10 per cent is almost guaranteed to cash flow, while any property under 8 per cent generally won’t.

This is a great little formula to use. It’s almost impossible to sift through hundreds of listings and complete a full analysis on each and every one.  This quick calculation will help you narrow your property search down and identify those properties that require further investigation and analysis.

You are now progressing on the path to becoming a well informed investor.  Stay tuned for part 4 Crunching the Numbers.

To Your Investing Success,

Jane & Richard





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