How To Maintain Cash Flow In Real Estate
October 24, 2020
The first thing that most people think of when talking about cash flow in real estate is to acquire a property capable of generating monthly rental income. But in reality, such properties, be it an apartment building, duplex, or a motel, require maintenance, which can cut a significant portion of your income.
There are many more alternatives to maintaining cash flow. If you work smart and figure out ways to borrow money on attractive loan terms, you can ease up on your tenant management and still get a good amount of cash flow. This guide will help you find smart ways to maintain your cash flow.
Determine What Is Good Interest Rate To You
Borrowing money should never be done in haste. Don’t just focus on the current need, but remember to factor in the future costs and payment terms every time you borrow. Borrowing terms can significantly vary based on the lender and the rate you will be paying.
Do not just rush into a loan deal without comparing it with similar products available.
Most investors buy properties at the undiscounted market price and also tend to borrow at the retail interest rates. The standard interest rates are more or less uniform across the market.
For instance, here is a list of loan types and the retail interest rate ranges associated with them:
- Credit card loan – 6- 24%
- Hard money lenders – 12-18%
- Commercial banks – 8-12%
- Commercial banks – 8-12%
- Passive investors – 8-12%
- Lenders who own property – 5-12%
- Seller financing 0-12%
The way these lenders fix the interest rate can also depend on their own criteria. For instance, hard money lenders lend based on equity and seller financing. So, finding an attractive loan deal depends on the level of research you do on each type of lender and approaching them in the best possible way to get a lowered interest rate.
If you have a good credit history, you can approach banks or passive investors to get a lowered interest rate. Similarly, if you can find sellers willing to finance the sale, you can get the lowest interest rates possible.
Most successful real estate investors manage to find motivated sellers and make them a good offer with the financing option. The lower the interest rate, the higher the down payment you can afford to make. This helps cut down on your monthly payments and maintain cash flow with any possible rental incomes.
Good loan terms go a long way in helping you earn profit from your property deals. If you find a seller who is willing to finance at a 6% rate, go for it. Compared to the standard 8% rate offered by banks, the seller’s loan terms can fetch you additional profits.
Use Investor Money To Fund Your Deals
Real estate is one of the solid markets you can rely on for profitable investments. Everyone knows this, especially people with money. But what prevents them from choosing real estate over stock markets is the fact that real estate requires time, effort, and a lot of patience.
Two major things that differentiate real estate from the stock market are:
- A good level of skills and knowledge is required to acquire below market value properties.
- Real estate can be bought with little to no down payment.
- Not everyone has the skill, time, and ambition to buy, manage, and deal with properties.
As an experienced real estate dealer, you can use this as an opportunity to find investors to help fund your deals.
The best part about real estate is that it provides an assured profit, the more you hold it, unlike stocks. Many investors will like the prospect of assured profits without having to put in the effort. And that is exactly what you can claim once you amass the skills to buy a property below market price.
You can use your skills to attract investors. There are three ways investors can help you fund deals.
- Fund for the down payment.
- Provide a source of credit for acquiring loans.
- Provide loans for the property
The recommended way to invest along with a partner is to simply borrow money from them at an agreed-upon interest rate that works best for you. Lenders would want higher returns, and they might ask for higher interest than banks. You can try negotiating to lower the rates by pledging any other property you own. Here are some more suggestions you can follow when partnering up with an investor:
- Buy properties that can get you immediate profit. You can use the investor’s money to drive down the price and reduce the debt.
- Avoid partnering up with more than one investor at a time.
- Make sure to write down an agreement and specify the way you intend to split profits, responsibilities, and the authorities for selling or renting. Make sure you both agree on all terms to avoid problems in the future.
Have An Agreement On The Holding Duration Of The Property
Do not partner up with someone who needs to borrow to invest with you. Look for investors who have ready cash to give you.
Avoid buying a house with a partner until you are confident of your skills necessary to buy and manage a property.
Flip Properties
Flipping is considered a quick way to make some cash in real estate. Flipping is a process where you buy a house, make improvements, and then sell them for a profit. Most buy-to-sell properties can be held for a maximum of 6 months. Any more than that can cost more in terms of maintenance and management and may thus offset the expected profits.
House flipping used to be way more popular than it is now for earning quick cash before the recession hit the market.
The good thing about flipping is if you have the skill for it, you can increase your cash flow considerably. But you have to make sure to get the property at a really good price so that, when you sell it at market price later, you can still make a good profit.
Choose to flip houses only when you can get a really good low-cost housing deal. If you are a beginner, it is all the more necessary to start with the lower end of the market. And avoid getting into flipping if you have to borrow a large amount of money to be able to invest.
Flipping can be risky, and if you go into it with borrowed money, you may risk defaulting on your monthly payments and hence, lose out any chance of making a profit.
Do factor the maintenance and renovation costs required to make a good sale while you negotiate the price for the house.
You also have to remember flipping does not provide the same tax benefits as holding and renting out a property does.
Choose your approach based on your affordability, skills, and market condition. Flipping can be very difficult in a dull market as you won’t be able to find enough buyers to sell off the property quickly. The more you hold on to a property meant for flipping, the more cost it bleeds in terms of maintenance and any loan repayments.
Apply For Government Funding
Besides the numerous tax breaks and deductions that you can take advantage of, you can also look into any available government funds to ease your cash burdens.
To boost a recessive market, governments usually come up with certain relief measures to aid in cash crunch issues. Make mortgage payments on time or seek out moratoriums to help maintain cash flow. Get to know about government funding projects and see if you qualify.
Conclusion
Building wealth from real estate is no easy task. But it is highly satisfying and can generate you a good deal of passive income once you start learning the trade. It is very much possible to have a good level of monthly cash flow and live a comfortable life as long as you have chosen the right deals with attractive loan terms and investment partnering.
Build your skills and put together a long term plan for your housing investments. It may take some time actually to see the huge profits you want, but you will get there as long as you follow the best practices and keep honing your management skills.