What is Cash Flow and How Do You Generate Cash Flow in Real Estate?

What is Cash Flow and How Do You Generate Cash Flow in Real Estate?

Posted by on Feb 12, 2021

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Cash flow is essential to any business. It is the difference between the money coming in and the money going out. 

That said, there are many ways to generate cash flow in real estate. First, let’s discuss what cash flow is, and what it comprises. 

Cash flow in real estate is the amount of profit you bring after expenses. 

The activities that generate cash inflows and outflows are in one of three different categories: operating activities, investing activities, and financing activities. 

In each of these categories, there are ways to increase cash flow in real estate. 

Cash Flow From Operating Activities

Operating activities are how a company runs its day-to-day business. In real estate, it includes things like property maintenance, utilities, property management fees, building improvements, taxes, insurance, paying salaries, and incoming rent. 

There are many operating activities that create unnecessary deductions from cash flow, like: 

  • Too many vacancies in a property 
  • High turnover rates of renters 
  • High insurance costs 
  • Non-paying renters 

These might all negatively impact cash flow, and some can’t be avoided, but there are ways to leverage operating activities for a potential increase in cash flow. For example: 

  • Doing preventive maintenance to avoid costly repairs 
  • Increasing rent 
  • Property improvements so you can command higher-paying tenants 
  • Finding long-term renters for stability 
  • Appealing property taxes 
  • Refinancing 

So, you can see, there are many ways to potentially generate cash flow in real estate with operating activities. If you inspect your current operating costs and see where there is potential for changes that is a good first start. 

Cash Flow From Investing Activities 

There are different real estate investing methods that might help you create high cash flow real estate. 

Leveraging Your Investment 

One example of increasing cash flow in real estate is with a Delaware Statutory Trust (DST). Using a DST, you can take equity from a property you own and use it to purchase a replacement like-kind property. In turn, the capital gains taxes on the sale will be deferred. You can then leverage the tax-deferred funds and use them to invest in higher cash flow real estate. 

Buy Positive Cash Flow Investments 

Above, we discussed how you could use a DST to leverage the cash from buying an exchange investment property to buy a higher cash flow investment. But, how can you figure out if a real estate investment has the potential to be cash-flow positive? What might make a property a good investment? Let’s discuss. 

  • The One Percent Rule says that if you can charge at least 1% of the price you purchased the property for, it is likely to have positive cash flow. This isn’t a hard and fast rule, and it doesn’t guarantee you will generate cash, but it is an excellent tool to have in your pocket. 
  • There are three key factors to look at to determine if a property has the potential for high cash flow: location, rentability, and appreciation. 

Keeping these factors in mind can help you focus on investing in properties with potential for gains, and less risk. 

Cash Flow From Financing Activities

Financing activities encompass how an investor raises funds to run the company. This can include debt, equity and dividends. This is a much more complex topic, but there are ways to leverage financing activities for the potential to increase cash flow. 

Negative cash flow investing activities include, but are not limited to: 

  • Repayment of existing long-term debt 
  • Redemption of bonds 
  • Repurchasing stock 
  • Payment of cash dividends to stockholders

There are also financing activities that might create high cash flow in real estate. Some examples include: 

  • Issuing long-term debt to investors 
  • Selling stock to investors 
  • Paying down debts 

No matter how you do it, there is always upside to increasing cash flow in real estate. And, when you generate more cash flow there might be more opportunities for investing and growing your portfolio. 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. There is no guarantee that the investment objectives of any particular program will be achieved.

 


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