“Cash flow” is a term that comes up in most conversations on real estate investing—and for good reason. As a landlord, if the rent you charge is significantly higher than your expenses, that difference can not only help you build wealth but can also serve as a potential cash cushion, there to soften the blow when you have too many vacancies or when the unexpected happens and you need reserves.
And the unexpected will happen, eventually. It could be anything from an old roof needing to be replaced to termite damage or even a bridge being built over your property. (Ask me how I know.)
After years of investing in real estate, I can assure you that I have no shortage of bizarre landlord stories.
In those tough situations, many real estate investors tap into whatever access to capital they have, whether it be reserves, lines of credit, or even their network of private lenders.
Even so, the conversation is mixed on how much cash flow is necessary to provide that “cushion” and how much is needed to help the investor grow his/her portfolio.
How Much Cash Flow is Enough?
Personally, I’ve always had the mindset that cash flow is king. When I began investing in real estate, I had a wife and two young children to support, and I was in search of more income.
Over the years, my sweet spot for minimum cash flow was about $300 to $400, but I must say that this goal hasn’t been attainable for every single property. Some properties have brought in less, while others have brought in much more.
For example, I have one property right now that cash flows $100 a month, and I hate it, but that’s just the way it shook out. I have quite a bit of equity in it, but the house isn’t worth much. The other extreme is that I have a property that cash flows $1,600 a month (never underestimate the power of improving a property for highest and best use).
So, instead of focusing on single properties, I started to look at my real estate portfolio in its entirety, and I think this is a practice investors of all experience levels would benefit from.
What is the average cash flow? What is your average cost of capital for all your properties?
For some investors, though, increasing cash flow is less of a priority compared to some of their other investing goals.
Investing Goals & Tax Implications
Investors who are already high income earners may be looking for tax write-offs and losses to offset earned income. In other words, having more cash flow (income) may not serve you in certain phases of your life from a taxation perspective.
Maybe before you invest in your next property you should ask your accountant about how much cash flow you can add without significantly increasing your taxes.
Other investors may be more interested in long-term capital gains and appreciation. My point is that getting more cash flow isn’t the goal for all real estate investors.
Ways to Increase Cash Flow
But if you’re like me, always looking to increase cash flow, there are a few ways to do it.
Of course, pursuing highest and best use of the property by making improvements is a common way to increase rent. But if you’re investing in higher-end properties with less room for improvement, this can be tough. After all, the more the property is worth, the more cash flow you need.
Another strategy is classic arbitrage: tapping into your equity in the property and investing that money somewhere else, making a higher return than your interest rate.
Certainly, cash flow helped build and sustain my real estate portfolio. Looking back, though, I believe combining my emphasis on cash flow with using arbitrage and tax-saving strategies such as taking passive losses allowed me to build wealth even faster.