Cashflow 101

Cashflow is the movement of cash in and out of your hand, your business or your investment.

Positive cashflow is the money that is left over after covering all your expenses- so your inflow of cash is more than outflow;
Negative cashflow is when your expenses or inflow of cash is lesser than outflow.


Like any other investment, your ultimate long term goal in real estate investing is generating positive cash flow, and paying minimum tax on your tax return. So act smart.

For example:

You buy a rental property as an investment. Say, you earn a rent of $1000 a month. But if your expenses like mortgage, insurance and repairs are $800, then you are in a positive cashflow situation of $200. In the case that your total expenses are $1200, then you will be in a negative cashflow situation of $200.

Here are some cash flows in real estate investing:

Positive (Inflows): Rental Income, Tax refunds (benefits), Sale of a property
Negative (Outflows): Mortgage payments, Repairs and Improvements, Property Taxes


Goal- Generate Positive Cashflow:

Your initial return from your investment house or unit may not be cashflow positive. As long as you are not in a financial hole (also depending on your current financial situation) and are close to break even, go for it. Let me elaborate. You could be either make money (cashflow positive), not be making or losing any money (breakeven) or be making losses from your investment venture (negative cashflow).

Remember also that you could be breaking even the first few years, when you buy a rental property. Be patient, and strategize how you will get positive soon. That is why real estate investing is a long term planning process and it is for the players who stick on.

So, how to make your returns positive cashflow:

One word: With Time

Over time, as other expenses go up, so will your rent that you charge your tenant. Rent is your main positive cashflow item.

Take a look at your negative cashflow items - Mortgage payments, Repairs and Improvements, Taxes, and lets discuss what will happen to those over time.

If your loan is a fixed term then your mortgage payments pretty much will stay stable. Also, the later payments will have more of the principal pay outs, and less of interest payments. That’s a good thing, it increases your ownership in the property.

Repairs and improvements will stabilize as well, since most of the major tasks and repairs show up initially in the first few months. Although, I must tell you all, that one of my properties is a very old dumpy house that I bought and renovated it. And every month, something or the other breaks down and needs fixing. This is something to be kept in mind if you buy very old houses, or even foreclosures for that matter. Buying a newer house, getting the house well inspected before buying it and before tenants move in, and being your own property manager will help you reduce your expenses greatly.

Property Taxes might go up each year, so, each year, do a thorough evaluation of your house, the comparative houses in the neighborhood, and make sure your house increased tax appraisal is justified. If not, dispute it. Even if the taxes do go up, it won’t be significant, and you could take a deduction for it on your income taxes.

If your intention is to sell your property in the next few years, you have an added advantage. Not only can you increase the rents every year, but your property values increases as well- that’s a fact. It could be 5 years or ten years, but you will be an increase in property value. So, if and when you sell it, you can take advantage of the property appreciation and make money.