Cash flow is a term that refers to a set of cash flows that allows you to measure your company’s financial performance. This term is often used in the real estate investment field, especially since it has a direct impact on the financial health of your business. So what is cash flow in real estate? How do you achieve positive cash flow to continue making money on your investment?
Definition of cash flow
In the real estate sector, cash flow is a means of assessing the interest in investing in a property in relation to its purchase price. Clearly, the higher the net return, the better the return on investment. In fact, as a good real estate investor, you should draw maximum income from the rental of your property after deduction of all costs and charges. These fixed expenses include mortgage payments, carrying charges, operating costs… Thus, the rental income must cover your total expenses and generate a cash surplus as income to estimate a profitable rental property.
Positive cash flow
The interest of any real estate investment is to offer you the possibility to enrich yourself and certainly not to impoverish you. In other words, you must always generate a positive cash flow on your rental investment. At the end of each month, your property must necessarily release you money, which you can use in different ways:
- the purchase of a new rental property or the investment within the framework of LMNP;
- reinvest the income in a stock market investment, life insurance or any other savings that will allow you to deal with the unforeseen events associated with your property;
- carry out maintenance or renovation work to improve the comfort of the rental property.
To find out more about the importance of cash flow in real estate, we can only advise you to find out more on the net or from real estate professionals.
Negative cash flow
If your cash flow is negative, this means that you necessarily pay more expenses than you receive income (rent). This situation has direct consequences on your financial health, as you have to put money back into your pocket every month. You will therefore be obliged to reduce your daily expenses in order to finance the work on your property.
How to generate positive cash flow?
Generally speaking, real estate cash flow depends on three main factors:
- The purchase price of the property: this parameter is very important because the lower the cost of the property, the lower the amount of money you borrow from your bank. You will reduce your monthly loan payments accordingly.
- The duration of the loan: a rule common to all investors is to negotiate the longest possible duration to minimize the monthly payments of the real estate loan.
- The number of active properties: your rental property is probably already generating positive cash flow, but you still need to multiply your property portfolio to infinitely increase your income. Indeed, the more the number of your properties increases, the more you will increase your monthly rental income.