How to identify positive cash flow investment property

The simple way to pinpoint positive cash flow opportunities

To invest in property and produce extra income, invesstors need to know how to identify positive cash flow property investment opportunities.

When you invest in the stock market, you aren’t in charge of your investment. Sales, profits, and the dividends you get paid are the realm of the management of the company whose shares you own. It’s different when you invest in property. It’s your business. Every property you buy is its little profit centre.

Here, we’ll introduce you to the factors to consider to identify positive cash flow investment property. You’ll learn a simple formula to check if a property might produce positive cash flow. And we’ll also show you how to protect your investment from the unexpected expense.

Income vs Costs

Just because an investment property is not cash flow positive for one person, does not mean it won’t be for you. It is one of the incredible things about property investing: you can make a property investment produce positive cash flow. For example, by paying a larger deposit, you’ll reduce your mortgage payments. It directly impacts cash flow.

The factors that you’ll need to consider when calculating cash flow include:

To improve your cash flow, increase your revenue and decrease your costs! Simple right?

The gross rental yield formula

Even though you have a lot of power as a property investor, there will be some properties you just won’t be able to turn into positive cash flow investments. I’ve seen investors visit a property and fall in love with it. They then kid themselves that they can afford to invest. They think they can slash costs and increase rent to above-market norms. They buy against advice and quickly discover the nightmare of an emotional property investment.

There are two ways to sort the wheat from the chaff when you’re looking to invest in positive cash flow investment properties. The first is to work your way through thousands of property listings. You’ll need to look at the fine details of each. Consider its location, type of property, and the property fundamentals that support investment. That’s a lot of work to get through. Especially when the following day there could be thousands of new property listings to plough through.

The second is to apply the gross rental yield formula. It is far simpler and will help to identify the investment properties that might produce positive cash flow. Here’s how it works:

Gross rental yield = ((gross annual rent/purchase price) x 100)%

For example, let’s say you pay a total of £160,000 for an investment property. It is likely to produce £1,300 monthly rental or £13,200 per year. Applying the gross yield formula:

(£15,600/£160,000) x 100 = 9.75%

What gross rental yield produce positive cash flow?

As a rule of thumb, a property that provides somewhere between 7% and 10% gross rental yield has a good chance of producing positive cash flow. Of course, this depends on the other factors that we’ve detailed above.

The gross rental yield formula will help you eliminate all the properties that are not worth spending valuable time investigating further.

Once you’ve identified the properties that give the best chance of positive cash flow, your next job will be to conduct an in-depth cash flow projection. Our two-year cash flow projection worksheet is an easy-to-use and comprehensive tool to help you do this. You won’t forget any cost. When calculating cash flow, a good tip is to always err on the side of caution: underestimate your income and overestimate your costs. This way, you build in a lot of wiggle room to your calculations.

How to protect your cash flow from the unexpected

Having found a great cash flow property and made your investment, you’ll need to protect it against accidental negative cash flow. There are three main threats to your cash flow position. Here’s what they are and how to protect yourself against them:

  • Void periods, between a tenant handing the keys in and a new tenant signing on the dotted line. Keep your tenant onside, be a good landlord, and put money aside to cover rent lost during void periods.
  • Unexpected repairs and maintenance could decimate your cash flow. New build properties are way less likely to give you such grief. I’d also recommend that you put around 5% of your rent into a maintenance account. You’ll soon have a tidy sum that will cover most eventualities.
  • An increase in mortgage interest rates will increase your costs. There are various ways to protect yourself against rising interest rates. For example, you might decide to increase the rent you charge to your tenant. One of the most effective strategies is to speak with a buy-to-let mortgage broker. They will help you find the best financing product for your investment property. It may be that fixing the interest rate on your buy-to-let mortgage is the option to choose – it will give you the certainty of costs while the fixed rate is in place.

Where do you start when you’re looking for positive cash flow for properties?

Searching for a positive cash flow investment property can be a daunting prospect. It could take days, weeks and months to find the best property investments for your objectives. Fortunately, there’s an easier way.

Contact one of our team today on +44 (0)207 923 6100. You’ll have the opportunity to discuss your objectives, concerns, and aspirations. We’ll introduce you to our property research, and the investment opportunities we have already identified and in the best places to invest in property UK.

Live with passion

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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