Cash Flow

Considering an Investment Property?

You have no trouble saving for a rainy day, figuring out who the best CPA in town is, and even know how to allocate funds in your 401k; but when it comes to selecting a good investment property, you haven’t got a clue.

Experts agree that a good investment is all about picking the right property. Cash flow, tax ramifications and vacancy rates are among the factors that must be evaluated if that studio has any hope of becoming part of a million-dollar real estate portfolio.

Since the purpose of an investment property is to put money into your pocket, first and foremost on the list of criteria is cash flow. While much has been written on the subject, it is not likely you’ll establish a positive cash flow right from the start, though it’s not impossible. More realistically, it might take several years before rental income exceeds expenses.

Finding the Perfect Investment Property For You

One of the fundamental elements to look for in an investment property — that can affect cash flow positively — is upside potential.

Defined as the amount of upward price movement anticipated, finding a property that, for example needs cosmetic work like paint or new carpet, can be a pivotal factor in increasing the rate of return.

Other physical characteristics to consider — and to inspect — before you buy are the condition of the electrical, plumbing and the roof. Because these items can be costly to repair, it is critical to have them checked thoroughly by a property inspector and know their condition up-front.

On the flip side, a newly constructed or recently renovated property will likely have few major repair items and offers an extended period of low maintenance costs. Your Prudential Locations Realtor is specially equipped to help you sort through these investment options.

Bottom line: Crunch all the numbers. In addition to knowing the condition of the building, you must also know the maintenance fees, real property taxes, gross excise tax, property management fees, what it will cost to obtain insurance, legal fees and mortgage costs, just to name a few.

Do Your Homework

Get professionals to help you and make sure your calculations are correct — that the amount you think you can rent it out for is realistic, that you can make the payments even without a renter, that you can afford it.

A general rule of thumb: think long term. Even though some developers and speculators are in and out of properties fast, unless you are a contractor or a tradesman with construction skills, the current market is probably not going to make you a quick buck by flipping properties. But by thinking long term, you will ultimately put cash into your pocket by reaping both a positive cash flow and growing equity.