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Posted over 9 years ago

No Stone Left Unturned When Exacting Cash Flows For Savvy Investors

Cash flow is a revenue or expense stream that changes a cash account over a specific period of time. For cash flow real estate investors, that time frame is normally tied to incremental payments made by Tenants over a lease term.

Cash Flows represent themselves in a positive or negative fashion and typically, the factors impacting the Investors cash flow can include property taxes, insurance, mortgage payments (debt service), repairs, maintenance, HOA, property management, vacancies, etc.

It's of paramount importance to leave no stone unturned when dealing with current and future expense in association with an Investor's real estate holdings.

One expense mistakenly overlooked by many is the Capital Repair line item. Allocating a portion of positive cash flows to repairs and replacements that will represent substantial cost in the future such as appliances and window replacements is wise.

Setting up a capital repair line item or even a separate cash account will be critical to the Investor and can even be helpful in defraying cost for events such as unit turns. 

Longer term tenants are what the Investor strives for but change is imminent. So when that long term Tenant moves out, the cash that was set aside each month over the lease term(s) will be there to assist the Investor in the refreshing of the property for the next Tenant.

A Simplified Cash Flow Formula...

Total Income - Total Expense = Free Cashflow (+/-)

That's it! This model works with single units or individual units inside a larger unit mix. Now surely there are other factors in regard to depreciation and the Investor's tax bracket and structure, however the key component to realize when exacting cash flows is to very transparent and honest with the individual costs that currently affect the property and the costs that will affect the property in the future.

Exacting cash flows will place each project on a firm foundation and dramatically increase the rate of their success. 

For a generalized but informaive look at cashflows. Check out this video on Investopedia

More to come on the topic...


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