An investment property is said to be cash flow positive when the rental income generated by the property covers all expenses incurred by the property and puts some money in your pocket. It is this simple principle when not followed leads to bad investments.
The beauty of a positive cash flow property is that it does not matter if the price of the property goes up or down. You can hold on to the property as long as you want, because rent takes care of all expenses and then puts some money in your pocket. So, it is a safe and smart way to invest for the long term. Over the long term, property values rise due to inflation. Eventually, when you decide to sell, you would have enjoyed all the cash flow and because you were able to hold on to the property for a longer duration, you would also be rewarded with equity growth. In addition to equity growth, rents also rise over time. So, your positive cash flow situation would have gotten even better with time. Additionally, in good times and bad times, there is always demand for good rental properties. When the economy is good, home prices go up, so more folks will be looking to rent and as a result rents rise. When the economy goes bad, people are cautious with home purchase and look to rent and as a result rents rise. You get the picture. By now, I hope you are convinced that buying positive cash flow properties is the way to go.
So, the next question is, how to tell if a property has potential for positive cash flow? It is actually quite simple : You estimate the rent and add up all the expenses to see if the rent covers everything and some. Expenses include items like property taxes, insurance, maintenance, property management fees, HOA fees, debt service etc.
