The worst mistake any real estate investor can make is to purchase a property that bleeds money each and every month. This is called negative cash flow. The term negative is used because the investor is required to dip into his own personal pockets to produce cash to make the investment break even each and every month. Unless you have an endless supply of money this is a losing strategy. This is why you need to understand the importance of cash flow.
Calculating cash flow requires you to understand the income and expenses you can expect to have with your purchase of any investment property. For income you will have rents. With rents you have to account for periods of time when the unit is vacant and you are not receiving any rents. You need to have a very accurate picture of what is the going rental rate for properties in the area. Don’t take the sellers word on what you can get for rents. Do you own due diligence.
The next step is to calculate your expenses. The most common expenses are mortgage payments, insurance and taxes. If you hire a property manager then you have to pay the property manager every month. Make sure you calculate the cost for doing repairs every month to the property.
Now that you have a clear understanding of your potential income and potential expenses you are able to calculate your monthly cash flow. The equation is:
Cash flow = income – expenses
When deciding whether or not to purchase a property you need to do the calculation on your cash flow. This figure will change each and every month as your income and expenses change. The goal is to have positive cash flow each and every month that you own the property.
If you run the numbers and realize that the cash flow is negative then you should not purchase the property. Some people make the mistake of purchase a property with negative cash flow because they are betting that the value of the property will increase significantly in a short period of time. With this increase, they can sell the house for a profit and they decide to make up the monthly loss in cash flow until they are able to sell the house for a profit. The problem with this strategy is that there is no guarantee that the value of the property will increase significantly in the near future. You have the potential of losing the house to foreclosure when you are unable to keep up with the necessary cash infusion every month.
More millionaires made their fortune investing in real estate than in any other form of investment. There are many methods of making a fortune in real estate investing. Regardless of the method that you use to build your fortune in real estate, you need a solid business plan to use as your road map to success. You can purchase the business plan I used to build a multi-million dollar real estate business.
If you ever wondered if it is possible to purchase real estate with no money and no credit, the answer is yes. Based on my years of real estate investing, I have written a book titled “8 Ways to Purchase Real Estate with No Money and No Credit.” You can purchase the book on my website. http://www.investinrealestate101.com/business-plan/Share on Facebook