Positive cash flow rental investment [Identify a rental real estate profitable property in 2023]

Like any other financial project, the stability of a real estate investment depends on its profitability. One of the best known strategies for such monitoring is cash flow. This indicator allows you to closely monitor your financial situation in the short, medium and long term. It is therefore important to review and interpret this report clearly, so that your rental investment develops in a solid and sustained manner over time. The most important thing is to know if you have a positive cash flow for your rental investment before buying a profitable property.
If you are here, it is because you want to generate a good cash flow, that is to say a high profitability of more than 10%… Discover how to generate a positive cash flow with rental real estate.

Table of Contents

• What is the cash flow?
• The positive cash flow strategy for rental investment
• The importance of cash flow in a rental investment :
• Entering and monitoring cash flow :
• React from the results of the positive cash flow rental investment
• Recommendations for a positive cash flow

What is the cash flow?

The cash flow, or also the cash flow, is a financial report that serves to differentiate the expenses from the income of a certain project during a period. In this sense, there are certain terms that are useful in knowing how to interpret the results of your investment. There are two types of cash flow:

Financial: related to the strictly monetary operations of the company. Operational: focuses on the money coming in or going out of business operations.
Investment: is money that has been spent on the use of a product that will provide a future benefit. A good example would be the purchase of a property.
We calculate cash flow to assess the return on an investment, i.e. its ability to generate money and remain solvent. A positive cash flow indicates that the current assets of the rental investment are growing. This allows you to pay off the mortgage payments, pay the expenses and why not reinvest in another project.

On the other hand, a negative cash flow means that the current assets of the investment are decreasing. Therefore, if the net cash flow of your rental investment is positive, it means that your income was higher than the expenses you had to face. And, on the contrary, if the cash flow is negative, it means that you have spent more than you have earned.

The positive cash flow strategy for rental investment

The positive cash flow rental investment strategy is a classic in rental real estate investment books. It essentially involves buying a property by paying a small percentage of the total price of the property. The rest of the amount is paid in installments to your bank. For this, some people prefer to rent their property. You can calculate your cash flow using the following formula :

Cash flow = rent – mortgage payment – utilities – other maintenance expenses

It is therefore essential that the rent to be charged is higher than the cost of the maturity plus the charges plus the maintenance costs of the property. This is the key point of the strategy, because if the rent received exceeds the cost of the maturity plus the expenses, your investment is well worth it. now you will have a stable income. And once your mortgage is paid off, this income increases considerably and you also become the owner of your property.

Nevertheless, in order for the strategy of positive cash flow rental investment to be effective, especially for a rental investment in the old building, it is necessary to check if the purchase price of your property is not expensive compared to the market prices.

Indeed, the selling price and the renting price of a property have a certain relationship. If in the area of your investment the selling price increases by 20%, for example, the rent will tend to increase. You should also keep in mind that there are risks of default, damage and renovation work when buying your property or changing tenants. Therefore, in order to use the positive cash flow rental investment strategy, you must first evaluate the property to be purchased to determine the long-term risks involved. A positive cash flow at the time of purchase is a necessary but not sufficient requirement to guarantee a good and stable return over time.

The importance of cash flow in a rental investment :

Nevertheless, in order for the strategy of positive cash flow rental investment to be effective, especially for a rental investment in the old building, it is necessary to check if the purchase price of your property is not expensive compared to the market prices.

Indeed, the selling price and the renting price of a property have a certain relationship. If in the area of your investment the selling price increases by 20%, for example, the rent will tend to increase. You should also keep in mind that there are risks of default, damage and renovation work when buying your property or changing tenants. Therefore, in order to use the positive cash flow rental investment strategy, you must first evaluate the property to be purchased to determine the long-term risks involved. A positive cash flow at the time of purchase is a necessary but not sufficient requirement to guarantee a good and stable return over time.

Entering and monitoring cash flow :

There are basically two ways to track a positive cash flow rental investment. You can record income and expenses yourself and then create a report that contains different data such as funds generated or used in investment activities, funds generated or used to finance other activities (expenses; works…). Alternatively, there are predefined monthly flow templates available for anyone who wishes to use them. These can be customized according to the characteristics of your investment.

However, since the data must be entered one by one and manually, it takes time and concentration to prepare a report with these templates without incurring errors or inconsistencies. If you do not know how to order your cash flow, you can delegate this task to companies specialized in real estate investment coaching.

React from the results of the positive cash flow rental investment

Because the positive cash flow report for rental investments provides you with key information about its performance, the decisions you can make over time vary.

In the case of rental investment in the old, this report allows you to set your budget for the purchase of your property and quickly make decisions on financing with the best rate offered by banks.

If your property requires renovation, this type of information will indicate the amount of money you have available to carry out the work. The cash flow calculation also gives you an idea of whether you can cover your outstanding debts. For example, if you need to talk to your bank to ask for a deferment of your mortgage payments. Having an idea about the amount of surplus money, you can think about refurbishing your property by renovating the facade or changing the old furniture. You can also acquire a new investment.

Recommendations for a positive cash flow

between the purchase of the property and its resale. It is also essential to have good communication with your tenants, as they can recommend you to other tenants and thus avoid rental vacancies.

Thereafter, in order to maintain a positive cash-flow ratio in your rental investment, it is advisable to make monthly projections to reach the set objectives. This practice is highly recommended, in order to be prepared to pay for a future expense, which will be made in the future without always knowing when or how much it will cost you. This way, you can prepare the necessary budget for this expense. There are dedicated software to manage your cash flow and this type of tasks. You should also know that cash flow is also a valuable element to prepare in emergency scenarios. In fact, doing analyses of your cash flow can give you insight into the different options you can take depending on the circumstances imposed by the real estate market. When your cash flow is negative, your decisions will be more rational and realistic.

In summary, preparing and knowing how to interpret the positive cash flow rental investment will allow you to act correctly in certain conditions. It is the tool that can best guarantee the profitability of your property in the present and the one that allows you to make the best projections of your income and expenses in the future.