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Can an investment property pay for itself?
One major consideration before buying an investment property is financing. If you have a good credit score and you are able to provide proof to lenders that you can make repayments on time, securing an investment property mortgage is easy.
Can an investment property pay for itself?
One major consideration before buying an investment property is financing. If you have a good credit score and you are able to provide proof to lenders that you can make repayments on time, securing an investment property mortgage is easy.
Once you buy an investment property, you’re under the contract of paying a debt back for 30 or so years, which can sound like a herculean task!
But, there are simple ways to make your property pay off itself. The secret is having positive cash flow.
Positive cash flow is the goal of every real estate investor. Regardless of the strategy you are planning to implement, an investment property that can generate a steady income is the end goal for you if you want your property to be able to finance itself through rental income.
So, how can you achieve this? Keep reading as we teach you how you can make your investment property profitable enough to pay for itself.
What is an investment property?
An investment property is a property bought and developed with the intention of earning revenue from it. Typically, owners make money through holding and renting the property while it appreciates, then selling it for a profit.
To learn more about investment properties, read here.
Cash flow in real estate
Cash flow refers to the amount of money that moves in and out of a business. Specifically, it refers to the movement of cash in terms of income and expenses.
There are two possible scenarios. The first is positive cash flow, which occurs when income is higher than expenditures. On the other hand, when expenses exceed the income being generated, the investment is considered as cash flow negative.
Cash flow is used in properties that are used for income-generation, such as rentals. In real estate, cash flow is the difference between a property’s income and expenses. A property can have positive cash flow, where there is more income than expenses and financing costs, or negative cash flow, where the expenses and financing costs exceed the income and you lose money each month.
Majority of investment property owners aim to buy real estate with positive cash flow. The higher the cash flow a property has, the more income the investor earns, which in turn can pay for the property’s loan. It can also provide a safety net when disruptions to other sources of income (if there are any) arise or there are unexpected expenses in the property.
How to calculate cash flow
Calculating cash flow for your investment property is simple. However, it is important to accurately determine the income and expenses on your property to have a proper estimate of your cash flow. Here are the things you need to determine:
- Gross income: This refers to the overall sum of the income you generate from your investment property.
- Operating expenses: This is the overall costs that come with operating an investment property to produce income.
- Net operating income: This is the result of subtracting expenses from your income. It refers to the profit you generate without including the capital expenditure into the equation.
To calculate cash flow, subtract your capital expenditures (one-time expenses that the real estate investor incurs at the start of the venture) from the net operating income.
Factors to consider when calculating your cash flow
As mentioned above, determining your operating expenses and income are important to know if your investment property has a positive cash flow. Here are some factors you should look into before buying an investment property:
Potential rental income
You can estimate your potential rental income for a rental property by comparing similarly priced and sized homes in the neighborhood that are currently being rented.
Cost of repairs/renovation/maintenance
What are the possible repairs or renovations that need to be done before it can be rented or leased? How long will the process take? How old are the assets included in the property? Don’t forget to ask yourself these questions before you buy a property.
Property management fees
If you are planning to rent out your property, you need to consider if you can manage being a landlord or you will need help. If you hire someone to manage your property, make sure that you are aware of the associated costs with hiring a property manager. A property manager will be in charge of handling advertising, screening potential tenants, scheduling inspections etc.
Insurance cost
Make sure to have a safety net for you and your property by purchasing insurance. It is recommended to have an umbrella insurance for your rentals to boost your overall liability protection.
Property taxes
Do your research and check the property tax rates in the state/city where your property is located. The rates can widely vary depending on where your property is based.
Utilities/council rates
Make sure to take into account the utilities or council rates you must pay in order to maintain your investment property. This can include garbage collection payments to the council or maintenance of certain areas in your property.
Vacancy
Be prepared to pay for your mortgage if your property is not generating income for a certain period due to a lack of tenants. This is why it is important to buy a property that is positively geared, or an investment property that generates an income that is larger than its overall expenses – including loan interest and principal payments. To learn more about positive and negative gearing, read here.
Bottom line
As you can see, it is feasible for an investment property to pay for itself. It will all come down to picking a positively geared property and following through with the right strategy. By following these tips, you can easily pay off the mortgage on your investment property.
Explore nestegg if you want more tips on how you can purchase your dream home or an investment property.
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