Real estate investing is a game. To play it well you must understand the four financial benefits of real estate and how to maximize them. Those benefits are:
1. Passive income (cash flow)
2. Equity build up (the payoff of your loan)
3. Tax advantages
4. Price appreciation
In this part of the article, we will be looking into the area of area number one. Benefit of passive income or cash flow. In most business and real estate, is always a game about numbers.
To play the game well you must understand how to manipulate the numbers to get the end results you want. The result being positive cash flow.
The method of calculating passive income/cash flow is the following:
Gross Rental Income
Minus: Vacancy
Equals: Adjusted Gross Income
Minus: Operating Expenses
Equals: Net Operating Income
Minus: Debt Service Payments
(mortgage)
Equals: Cash Flow Before Taxes
Ok, now that I explained what all the numbers are, here are the keys to creating more cash flow. There is only basically two ways to do it. You have to get more income by increasing the rents and/or reducing vacancies losses or you need to reduce your operating expenses and /or your loan payments.
If you\’re really interested in buying a rental property, it should be understandable to you that the lower amount you pay for the rental property, consequently your loan or Debt Service Payments is lower, the higher amount you get for your cash flow.
It is extremely important that before you every buy any rental real estate that you look at the cash flow and you should run the numbers using three different scenarios.
The best is where your cash flow are high and operating expenses are low, the worst case scenario is where your rental income is low and operating expenses are high and then the average scenario. If worst case scenario would come up with a good profit or if is still making sense to you, then it should be obvious to get in and buy the property.
Who else wants Toronto power of sale and foreclosure home?. Stop by Jameson Lee\’s site where you can find out all about Toronto\’s real estate market and what it can do for you.
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