Why is cash flow important?

Question

I am very new to real estate investing and was wondering why cash flow is so important. If you can rent a house out and have the rent cover the expenses and mortgage with nothing left over isn't it still a good deal? Obviously extra money is always preferable but isn't having your renters pay down the mortgage without any cash flow still a good deal?

David Dachtera · Answer

@Chase A.,

A business - REI IS a business! - should pay for itself, would you agree?

Each property needs its own reserves for "stuff" that happens, especially out your way with the weather you've been having.

Equity is "nice", but it doesn't pay the bills. You want you income properties to produce ... well, income. Eventually - either now or in retirement - you'll want to let go of your 9 to 5.

Would you take job that didn't provide income?

Why keep property which doesn't produce income?

The definition of an "asset" is one which produces income beyond it's expenses. Otherwise, it's a liability.

Scott Steffek · Answer

When cash flow on a rental property is calculated, several "expenses" are factored in every month. You should deduct monthly management expenses, taxes, insurance, vacancy and maintenance. Some people deduct 5% of the monthly rent and others 7% and others still, 10%. So it's like a theoretical "cost" sheet. You're already paying insurance, management fees and taxes. But this just breaks it down month by month. So you might want to take whatever the total number of deductions are and stick that money into a bank account. Especially the vacancy and maintenance funds. So if something does happen, you'll have at least a little bit of money saved. I guess it all depends on whether or not you're cash strapped. But it's a great way to figure out your expenses. At the end of the year, your costs might be lower than what was calculated, or it might be more. I would suggest you keep track of it. Kenneth is right. Things go wrong. So if your just breaking even and your mortgage is being paid off and there's nothing left and something goes wrong, now you're in the hole.  Does that sound like a good investment to you? What if you had a bad tenant in the house and they tear it up? What if they don't pay the rent? What if they move out and it takes a month or more to find a new tenant. Now you can't even cover the mortgage payment. There are plenty of homes where you can get a minimum return of 7%, after all expenses are paid (unless you're in California).We give our buyers a minimum of 10%. So find a property that "cash flows". In other words, find a house where there's money left over after all the monthly expenses are paid. You'll thank yourself! Best of luck to you.

Kenneth Garrett · Answer

@Chase A.

I agree with @David Dachtera you need to treat things like a business.  Everyone should be in business to make a profit.  A few thoughts:

What happens when the lease ends and it takes 60-90 days to find a new tenant or repairs to the unit.

What happens when the roof needs replacement, sewer line breaks or the myriad of other things that can happen

What happens when the tenant doesn't pay.  Eviction has to be filed.  In Illinois, it can take 6  months depending on the time of year.  Research how your state looks at evictions.

You need cash flow - take advantage of the many tax advantages that are available to you.

Good Luck.

Thomas S. · Answer

Investing in rental properties is all about income. You need it to buy groceries and pay your personal bills. Paying down a mortgage is not the goal of rental property investing. It is the gravy at the end if you are lucky enough to live to see it.

You will get very tired very quickly in this business if you are not making any money and it will all be for not if you die in a car accident the day the mortgage is paid off.

Investors expect a return on their investment. If all you have is the equity that will disappear in a heart beat the day the real estate markets turn or when the house requires a new roof. Smart investors also know the value of positive cash flow when making future investments.

Breaking even is not the goal of business.

Why is cash flow important?

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