Understanding Cashflow. What is good cashflow?
Hi All,
I'm trying to understand cashflow. I'm looking to invest in the Canadian market. There are many articles on the internet that show as little as 1-2% of property investments cashflow. I find that number staggering considering the billions of dollars of both institutional and retail money invested in real estate every year.
I'm trying to understand cashflow a bit better. Let's imagine I have $100k to invest in a $300k property. Over a 20 year period my mortgage + costs is $1600 a month. My rental income is $2000 per month. I'm making $400 in cashflow. Following a similar model, imagine I put 5% down. All of a sudden by mortgage payments are $2200 per month over 20 years. The property is in negative cashflow.
I clearly need to understand this process better. Is cash flow down to the down payment versus debt most of the time? In which case, if you have a wad of cash it makes sense to invest in real estate. Why?
A $400 cashlow, is approximately a 5% yield on your $100k investment or annum. If you put the funds in a savings account with a 5% return, compounded over 20 years, you will get back $270k. Lets take a look at the property investment.. Assuming the property appreciates at a modest 1% a year, the $300k property is now worth $366k. The difference in investing in the savings account versus property is now $96k making the property worthwhile. This is a crazy simple example. I'm trying to understand 1) how is a cash flowing property defined? 2) why so many people invest in real estate given the alternatives.
Thanks all