3 Tips to Find Cash-Flowing Properties (Including Using the Cash Zone Formula!)

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Positive cash flow on a property usually occurs when rents are high and interest rates are low or after you’ve owned a home long enough that you’ve made a substantial dent in your own principal.

When deciding if a property is right for you, it’s important to check out your investment objectives, along with the availability of properties within your desired areas. Sometimes cash flowing properties are nearly impossible to find and may be found in areas of large rental demand but lower growth — for example, housing developments near specialized industries such as mining.

Practice makes a man perfect. So, the more you get out there, hurl out your offers, and do your due diligence, the more at ease you’ll be with the whole process of real estate investing. Truth be told is a key element in your prosperity at finding and making positive cash flow deals. This will help you to figure out how to negotiate terms in your favor.

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3 Tips to Find Cash-Flowing Properties

1. Have a business mindset.

Investment in real estate is not completely a passive form of investment. Any property you are buying is a small company with revenues and costs, both of which have a chance to affect you as the landlord.

When you buy stocks or bonds, there is nothing you can do to increase the income you get — the success or failure of your investments depends upon business strategies.

Related: How to Analyze a Rental Property to Know if it Will ACTUALLY Produce Income

But with real estate, you can work on both sides of the equation. Start with a business mindset and analyzing and investing in potential income properties that support your overall business plan.

2. Become a geographical specialist.

The first step in the development of your own business strategy is to identify economically strong areas to invest in. After you’ve found good investment cities, select one or two areas (preferably the ones close to you) and limit your investments to only those areas.

Many newbies buy property where they find a deal. The big problem with this strategy is that investing takes a lot of research to do well. So, every time they buy in a new community, they either spend too much time getting to know the local economy and real estate market or they do not have enough time, leading to loss.

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3. Use the cash zone formula.

For real estate investors seeking cash flowing properties, the cash-zone formula (profit formula or cash flow equation) is a nice rule of thumb for calculating earnings:

The Cash Zone Formula = (Gross Annual Rent/Purchase Price) x 100 = Cash Flow Zone Percentage

Related: The 3-Step Process for Evaluating a Prospective Investment Property

For example, you wish to buy a property for $200,000 and you’ll end up getting $1,500 monthly rent. The annual rent of the property will be $18,000. When you divide that by the purchase price of $200,000, multiplied by 100, you should end up getting 9%.

This shows that the property is worth thinking about further because any property that lies between 8-10% has the capacity to generate positive cash flow.

What do you think about these tips? Would you like to add some more?

Let me know with a comment!

About Author

Mark Ainley

Mark Ainley is founder of GC Realty and Development and GC Realty Investments. Mark has been an active real estate investor since 2003. He started slowly by flipping condos and acquiring a couple of investment properties. Since 2003, Mark and his team have successfully renovated and stabilized over 200 properties.

10 Comments

  1. Joshua Vallario

    Incorrect way to do a CAP rate analysis. You use the NOI not the GOI. Your way tells you nothing and is completely misleading! Yu have a responsibility to be correct, given the high population of newbies on this site.

    Most of the articles on the blog are garbage. This is just anothet one added to the pile. Learn your stuff before you write…

    • Roy N.

      Josh,

      Both CAP and GRM are single point metrics which are of little practical value themselves – particularly when looking at residential properties (1 – 4) unit which are bought and sold using valuations based upon comparable sales.

      Even when analysing the purchase of a mid-sized apartment (say 50-units), I’m concerned with the rate of return {(M)IRR} of the business and do not care about the CAP rate. When it comes time to sell that apartment building, I’ll look at market CAP to give me an idea on what folks are willing to pay for cash flow.

    • Mike McKinzie

      Joshua, it is early and I may have missed it but the author never used the term “CAP RATE” or ROI or NOI. He used the term “Cash Zone Formula.” It is most closely akin to a Gross Rent Multiplier. Your criticism of the author, and the blogs on the site are completely unwarranted. Obviously, to analyze a real estate investment, there are dozens of different numbers to consider. Every wealthy investor I know never bought for cash flow, they bought for appreciation. Since I retired at age 50, I invest for cash flow. Therefore, monthly expenses meant absolutely nothing to them (by wealthy, I mean a six figure monthly income and an eight figure net worth). The author talked about 1 metric and I bet he uses a dozen more before buying, since he has bought over 200 properties. His example would not be a great cash flow investment, but if it doubled in value in 8 years, it might be good! If you can’t say something nice, at least be constructive, not critical.

  2. Andy H.

    Definitely agree on getting to know the geographic area and market before you jump in and invest.

    Personally, if looking for a cash flowing property, we’d pass on a $200,000 property that only generates $1500 monthly rent though . Even just using the 50% rule as a quick and dirty approximation and assuming 20% down on a 30 yr fixed rate mortgage, you’d end up with negative cash flow. In a perfect world where there were no unexpected expenses and if you did your own management or if you had the right financing, you might end up with positive cash flow, but the return doesn’t seem to justify the risk. Maybe I’ve just missed something though.

  3. Jared Sawyer

    I’m with Andy H. Not seeing how this property would be a good choice with the 50% rule. Also, using 2% rule you are only at .75%. Some other good points are made in the article but I am interested more in the thought process behind the valuation.

  4. David van Brunt

    The cash zone formula doesn’t really provide information in my market, where taxes are so high that a $1,500 rent can only cash flow well if a place can be acquired for <155,000 all-in (including repairs). I've done the Cash on Cash calculation on many listings, and have found taxes swing the differences between good and bad. A little scary given that taxes can change significantly, and there's little you can do about it (but raise rents, risk vacancy).

  5. Steve Vaughan

    I like your cash-flow zone formula and appreciate the article. My down and dirty, see if it’s worth looking into further is similar to annual gross/pp *100 but just done as a monthly for ease. Something close to 1%/mo in my area is worth looking into, but rarely happens anymore.
    If one’s area has higher tax rates or some other fixed cost like utilities, one would have to adjust their criteria to find properties to analyze further is all. The formula still gives you an idea.
    You’ve written at least 1 more blog post than I have and I applaud your effort!

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