The goal of any investor is to make as much profit as possible while taking the lowest amount of risk.
In the world of real estate investing, a property is said to be profitable if its cash flow is positive. In other words, a positive cash flow property means that the investment is lucrative and paying itself off.
Before buying an income property in Detroit it’s crucial that you assess its potential cash flow first. But with so many options how do you find a positive cash flow property?
In today’s article, you’ll learn 9 tips for positive cash flow when investing in income property.
What does cash flow mean?
In its simplest terms, cash flow is the amount of cash that your investment property is making after taking into account the revenue and expenses.
Revenue is the income that you get from renting out your property. Expenses, on the other hand, are the costs associated with running your property. Some examples of typical expenses include operating costs, and mortgage payments.
For your Detroit income property to be cash flow positive, the income must be greater than such expenses. Negative cash flow is simply the opposite.
9 Tips for Positive Cash Flow When Investing in Real Estate
Tip #1: Get your finances in order.
Investing in real estate is a huge financial undertaking. As such, it’s important that you have an idea of how you are going to finance the purchase.
Once you have identified a property that you want to buy, the next step is to arrange a meeting with your mortgage lender. The goal here is to understand the available options that you have.
If you have some equity elsewhere, that might help you finance your next investment. Do you have an existing mortgage? Can you afford an extra one? Taking a detailed look at your current financial situation is extremely important before investing in real estate.
Tip #2: Pick the right location.
When you are buying a property, careful research is the key to success. This is especially important when it comes to investment property location.
That’s why the age old punch line “Location, Location, Location” still rules when it comes to real estate investments.
Many investors choose to invest in their areas primarily because of ease of management. However, this doesn’t mean that you should not consider out-of-state investments.
So, what makes a location ideal for an income property investment in Detroit? To begin with, the area must have a high demand for rentals. Of course, a high demand means that you’ll have short vacancy cycles.
The best indicator for rental demand is the presence of economic hubs and universities in a particular area. These attract families and students to live there.
Another indicator of the health of the housing market is unemployment and population growth rates.
Tip #3: Consider investing in a multi-family property.
Not all investment properties are created equal. Some can generate a significantly higher cash flow as compared to others.
If you want to maximize your profits, then consider investing in a multi-family property. Besides the rental income, multi-family investing can also mean certain tax breaks and more lenient financing.
The significant drawback of investing in a multi-family property is the high acquisition cost.
Tip #4: Conduct a comparative market analysis.
The goal here is to make sure that you aren’t overpaying for the property. Essentially, a comparative market analysis looks at the value of other properties within a neighborhood relative to yours.
You can either do it yourself or you can hire a professional to do it for you.
Tip #5: Invest in a turn-key property.
One of the biggest barriers to being cash flow positive is having to do renovations when you purchase a property. You’ll be burning through cash to pay for the costs of renovations, as well as the mortgage while the property is vacant. Investing in a turnkey property can help solve these two problems.
With a turnkey property, your property will be fully renovated and ready to rent out immediately.
Tip #6: Know your marketing strategy.
Your property will not always be 100% occupied. It’s important that you know how to market your property should it become vacant.
Your marketing strategy needs to be effective, as a vacant property can quickly eat into your cash flow. Before purchasing a property make sure you have a detailed marketing strategy in place.
Tip #7: Know how to screen prospective tenants.
Nothing kills a potentially good ROI on an income property like a bad tenant. Having a thorough tenant screening process is necessary to the success of your rental business.
A good screening process checks for the prospective tenant’s income, and rental and criminal background. It also checks for the tenant’s creditworthiness.
Tip #8: Draw up an iron-clad rental agreement.
Have a clear lease in place with all details written out to avoid any confusion and misunderstanding.
Among other things, it should stipulate key things like:
- The amount of rent and where and when it is due.
- Whether pets are allowed or not.
- The duties and responsibilities of each party in regards to repair and maintenance.
- The occupant limits.
- Whether subletting is permitted or not.
If you find the drafting process daunting, then please consider hiring professional services.
Tip #9: Consider hiring a property management company.
If this is your first income property or you don’t have the time or desire to answer late night calls, then hire a property management company. This is because landlording isn’t easy.
A good property management company will do more than just answer those 2 a.m. calls. They can help you find and screen tenants. Handle all the repair and maintenance for you. And, if need be, evict a problem tenant out of your property.
These are the 9 crucial things that any serious investor should do when considering investing in real estate in Detroit, MI. Mistakes can be costly, and the only way to avoid them is by learning as much as possible about how the industry operates.