3 Tips To Find Cash-Flowing Properties

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.

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.

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.

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

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.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.