Understanding Cashflow. What is good cashflow?

[Rory Galvin]

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