Getting positive cash flow from property -Abiodun Doherty

One of the best pieces of advice I have ever read on investment simply states that ‘cash flow is king’. Cash flow is the amount of money that regularly flows into your account from a particular investment. 

However, that statement did not differentiate between positive cash flow and negative cash flow. A negative cash flow is a situation where money flows through your hand but the process of generating the money costs more than the benefits derived. 

Positive cash flow on the other hand ,is a situation where the cost of generating the benefits gained from an investment is less than the benefits derived. In a sense, this is simply making a choice between a profitable and an unprofitable investment.

The journey to positive cash flow often begins when you are buying the property. If you miss it at this stage, it may change the calculation against you. Unfortunately the issue of positive cash flow is not what many would-be investors consider before embarking on this investment journey. 

One principal point to note at this stage that could later prove decisive is the price the property is offered for purchase. As part of your strategies for achieving positive cash flow, you should endeavour to purchase the property at a discount. If you purchase a property at the wrong price, it may take longer for you to achieve a positive cash flow status.

When you buy a property at a discount you give yourself a margin of error in your projection that should protect you against any unforeseen circumstances that may arise in future. It also ensures that the property is immediately profitable even before you engage in any repairs or other maintenance expenses.

 An investment that is properly protected in this way has a stronger chance of surviving downturns .Although people who invest in property might not have had the bitter experiences of those who lost several billions during the stock market crash, they nevertheless had their own bitter experiences to share. If a property is overpriced and bought by an investor and soon after there is a crash in prices for whatever reason, such an investor would lose a lot of money. In addition, if such an investor decides to convert his real estate assets to cash, he may find it difficult to sell such property because the price is far higher than the actual market price. If the investor is under pressure to sell, he or she may have to accept a discounted price for the property.

Sometimes the maintenance cost of a property may determine whether or not the cash flow is negative or positive. It cannot be overemphasised that you need to be sure of the strength of the building you want to buy.

 In recent years we have had several incidence of collapsed building that has given the whole nation a wake-up call. Imagine the loss of lives, properties and investment that this as resulted in. One cannot take too much precaution in this regard.

To achieve a positive cash flow it is better to approach the issue scientifically or objectively. You should list out all the income and expenditures that come along with owning that particular property. 

If you bought the property through mortgages, then your calculation should include monthly repayments and associated expenses. Then all incomes should be calculated and projected. If after making all these deductions the property is still generating a simple income, then it is a positive cash flow property.

One of the advantages of a positive-cash-flow property is that it empowers the owner to buy more properties because he truly has savings. In addition, real estate investment has its own ups and downs. If an investor is over exposed to one or more properties with negative cash flow, it could cost him the entire investment without anything to show for it.

During the global financial crisis, several real estate investors lost their properties and in some cases, homes, as a result of over exposure to negative cash flow properties. 

Remember that one of the possibilities of owning a rental property is the vacancy ratio. This is the period when your property is vacant and you are sourcing for a tenant to rent the property. If all your expenditures depend on the income from the property, this could put you under significant pressure.

Moreover, it is possible to be asset rich and lack cash if you did not structure your real estate investment with the intention of having a positive cash flow. This is also the reason why many end up selling their properties at a bargain to solve problems rather than make money.

One of the beauties of real estate investment is the ability to appreciate in value while also putting money in your pocket. You should not sacrifice one for the other.


Source:Punch Newspaper.