Investing in real estate is a hotcake. People buy the land in hopes of it getting expensive over due course of time and then selling it off to gain desired benefits.

What people don’t realize is that real estate investment is not a piece of cake. When you buy a property, it is similar to investing in a small business. If you are not careful, you may suffer a loss. That’s where calculation of real cash flow comes in for properties.

A Sound Business Strategy

This is money we are talking about so you should be serious about it. Adopt a business mindset and treat your investment like your baby. As a land, any piece of property you buy will have its due share of revenues and expenses, so know where you are getting into.

You should know that investing in real estate is different than forex trading, buying currency bonds and trading stocks. In all the 3 mentioned businesses, you cannot do anything. It is more a matter of luck, but real estate, you can start from couple of hundreds and end up becoming a billionaire.

Donald Trump is an example of successful real estate investor. He’s currently the president of United States of America and enjoys a total net worth of 3.5 billion dollars.

Conversely, if you’re not careful, you may slip from your millions and end up on streets.

The Golden Formula of Calculating Real Cash Flow

The cash flow formula = (gross annual rent/purchase price) x 100 = cash flow zone percentage

Suppose you wanted to buy a house, which has its worth of 200,000 dollars. You buy the house and then if you give it on rent, you’ll get 1500 dollars per month. Now, when you divide the gross rental revenue of 18,000 dollars by cost price of 200,000 dollars, you get 9%. This means, that in the end, the property was worth of investing.

As a thumb rule, any property lying inside 8% – 10% will generate a positive real cash flow while greater than 10% is a guarantee to generate cash.

Any property, with a percentage score of less than 8% typically won’t generate a positive cash flow.

Additional Costs

Keep your mind open to utilization of budget in the following areas:

  • Legal costs

  • Property survey

  • Repairs and renovations (on average, you should spend about 5% of your monthly profit on repairs)

  • Appraisal

  • Utilities

  • Mortgage

Financial Calculations

Once you have made up your mind to buy a certain property, make calculations to support your mind. Make a checklist and calculate the cash flow.

Even if you are not a big fan of Mathematics, remember that calculations help you determine whether the property is worth buying or not.

Remember: ‘Readiness’ includes the mental development of a property investor. Rely on logic and not mere speculations that this property will fail and that property will survive. Do your homework of calculations and always know what you are getting into. Being prepared to do the work through which you’ll get successful is an epitome of 50% achieved victory.