slogan
Free Rental Analysis
Call us today! 407.578.6545

Enter your rental property address below to get your free rental analysis.

Property Management Blog

What's more important, Returns or Cash Flow?

System - Sunday, January 27, 2013

In our practice, almost on a daily basis we find ourselves giving investment advise to clients. Our focus tend to be geared to the potential return on investment and the ease of renting the unit to the best possible tenant. What about the potential cash flow? is this important? Recently I read this article on PropertyManager.com from Appfolio Property Manager, Posted on 29. Nov, 2012 by Leonard Baron. It portrays a clear picture of what cash flow really means.


"If you are thinking about buying some rental properties as investments, you should probably understand how to project cash flows and evaluate the investment returns you hope to achieve on your hard earned invested cash equity.

There are really two types of returns that we can earn on investment property, first is appreciation in value which is the most common hoped for return. Secondly, and much more important but generally overlooked by investors, is the cash flow picture the property will generate.

The vast majority of investors buy real estate with the hope that it will go up in value. This is really a big mistake because many properties, particularly the prize “location, location, location” properties have corresponding negative cash flows on operations that may negate any true increase in wealth from one’s long term appreciation in value.

So a savvy investor needs to look at the cash flow picture and buy properties with positive cash flows, not negative cash flows. As an example of this in San Diego, one could buy a fancy downtown condominium for $500,000 which would rent for about $2,300 per month. That rent, minus all the maintenance expenses, HOA fees, insurance, property taxes, and mortgage payment would have a deficit on cash flows of about ($1,000) per month, or ($12,000) per year.

So while a buyer is hoping some appreciation in value will earn him or her a fair rate of return, that appreciation has to additionally compensate for all the money he has to take out of his savings to cover the negative cash flows. Those negative cash flows, on this example, could span several decades and hundreds of thousands of dollars before the property turns positive.

Alternatively, there are many properties that cash flow positive from day one as an investment. A moderately priced house or condominium unit, only a few miles away from downtown in the $150,000 price range, might generate $1,200 per month in rent and positive cash flows of $225 per month. That’s $2,700 per year of positive cash flow. As a side note – the appreciation in value, over the long term, will probably be similar on both properties anyhow. So why not go for cash flow plus appreciation in value!

To calculate a cash on cash return, we divide that $2,700 positive cash flow by the cash equity we invested, maybe $40,000 on the $150,000 property for a cash on cash investment return of 6.75% on our money. And that’s a really good deal! Especially compared to the fancy prize condominium that might generate a negative (8.5%) return on our invested equity.

There is more guidance in the Investment article noted below if you desire to study further. However, as a long term investor, I can assure you that positive cash flow properties, so properties that pay all the bills and provide a rate of return on your money, are much better investments than negative cash flow fancy prize properties that just drain money from your bank account. Hopefully you’ll understand this concept before you buy that prize!"



Leonard Baron is America’s Real Estate Professor – his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate buyers how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.

Areas Served

Have a Question or Need More Information? Contact Us

Stay Connected With Us

Copyright © 24242424 RentCare. All Rights Reserved.
Built by PMW | Privacy Policy | Sitemap

RentCare Property Management
A Division of CT Homes Realty Corporation

13790 Bridgewater Crossings Blvd. #1080
Windermere, FL 34786

p:
f: 407.578.1715

Equal Housing Logo Orlando Regional Realtor Logo Top Property Management Company in Orlando Realtor MLS Logo NARPM Logo PM 2020 Badge Highly Recommended by Locals On Alignable
Disclaimer: Neither RentCare Property Management, nor Francisco Nieves-Taranto, nor CT Homes Realty Corp. represent any content on this website, including videos, as legal advice. It is shared as informational only and it is up to the user to use this information responsibly. We recommend the user seek legal advice before relying on any information herein. All content expresses the views of the author as of the date indicated and such views are subject to change without notice. We have no duty or obligation to update the information contained herein. All information is being made available for educational and entertainment purposes only and should not be used for any other purpose. We believe the information contained is reliable, however, we cannot guarantee the accuracy of such information and we have not independently verified the accuracy or completeness of any information given. This information may not be copied or used in whole or in part, in any form without prior written consent.

RentCare Property Management is committed to ensuring that its website is accessible to people with disabilities. All the pages on our website will meet W3C WAI's Web Content Accessibility Guidelines 2.0, Level A conformance. Any issues should be reported to info@rentcare.net. Website Accessibility Policy