When investing in real estate, there are two important aspects you need to consider.
The first is income and the second is expenses. Combined together, these are the factors that create investor cash flow. If income is higher than expenses, you have positive cash flow; if expenses are higher, you have negative cash flow. It’s always better, as you can imagine, to have a cash flow that is positive.
Cash flow is the amount of profit you bring in each month. It’s the amount you’re left with after collecting all income, paying for operating expenses, paying the mortgages, making repairs, and placing a certain amount in savings. (Among many other potential expenses that come with real estate investments.)
Cash flow matters. It can be the difference between a successful investment and a financial failure. It can be the difference between expanding your investments or staying with only a few properties.
If you are an experienced investor, you’ve probably heard a lot about cash flow. But have you ever considered why it’s so important? Have you ever really thought about the serious benefits from maintaining positive cash flow?
Top 6 Benefits of Positive Investor Cash Flow
1. More Opportunity
Many investment strategies are based on growth. The ability to reinvest capital from one property and funnel it to another is a fundamental component for expansion. Reinvesting cash, however, can be difficult if you are not maintaining steady cash flow.
Suppose an attractive property comes to the market. It would be easy to rent out, and it’s priced perfectly for your budget. If you have positive cash flow, you can make the purchase much faster, using your profits to qualify for a new investment loan. Or you could, if you have saved enough, make a cash purchase.
With positive cash flow, you are able to move much faster when an opportunity presents itself.
2. Makes Growth Easier
This is strongly tied to the first point. (Arguably, it’s the same point framed in a different way.) By maintaining a positive cash flow, you have a better chance at growing your investment portfolio. This growth can also be much stronger, with a solid foundation based on a steady flow of cash.
3. Financial Safety Net
A positive cash flow (along with steady saving and sound management) creates a financial safety net that can save your investment portfolio in the event of an emergency.
When property investment is going well, it’s one of the best ways to earn a steady income. But when it goes bad, when renters can’t pay, when properties sit vacant, when repair costs pile up, owning property can be fraught with difficulty.
A positive cash flow provides a safety net, allowing you to deal with any emergency or sustained challenge.
4. Keeps Investors Away from High Debt Loads
Utilizing debt can be an important part of your investment strategy. When managed properly, it helps you purchase profitable homes and earn a strong, steady income. But it’s possible for investors to overextend themselves, to stretch their budgets by having too much debt without enough money coming in.
A strong positive cash flow based on solid financial principles allows you to stay away from overly-burdensome debt loads.
5. Simplifies Budgets and Finance
Wouldn’t it be nice if life were simpler? This goes for home, family, school, work, and investments. With a positive cash flow, your investment strategy can often be less complicated.
How? A positive cash flow could allow you to make a purchase without taking on another loan. Loans, as we have discussed, can be useful for investors, but each one adds a layer of complication. With positive cash flow, you can skip some of these complex loans and maintain a more streamlined investment strategy.
6. Reduces Stress!
Numbers aside, we could all use a little less stress in our lives. With a positive cash flow, you can work through your investments with less stress and less worry. All of the above points, when combined and considered together, create less stress for you.
By having a positive cash flow, supported by the affordable financing, you can go through the daily tasks of operating an investment-property portfolio with less stress.
The Importance of Selecting the Right DSCR Program
Investor cash flow, as we have shown, is one of the most important factors for a successful investment strategy. If you want to maximize your profits and increase opportunities, you need to manage cash flow wisely.
Selecting the right investment loan is a part of this strategy. Many investors, for good reason, select debt-service coverage ratio loans, also known as “DSCR loans.” These programs allow investors to make a purchase based on how much money the property will bring in and how much it will cost to own and maintain. They are excellent options for established investors who can no longer use traditional tax returns to verify their income on a mortgage application.
Many loan officers and mortgage organizations offer these loans. That might seem like a good thing, but it creates potential problems for investors who choose the first loan officer that find that offers DSCR loans. In fact, one of the biggest mistakes investors can make is selecting the wrong officer, which can lead to the wrong DSCR loan.
There are over 50 different mortgage organizations (mortgage investors) that offer versions of the debt-service coverage ratio program. Unfortunately, each investor has a different set of guidelines and qualification requirements. The differences from office to office can make an impact in qualification, and it can change what interest rate you get on the loan.
Interest rate can have a massive effect on your cash flow. A low interest rate, while certainly not the only factor, can help you maintain a positive cash flow. This makes selecting the right loan officer absolutely critical when you are choosing a DSCR loan.
Make sure you work with a loan officer who has experience with these types of loans. Contact our team today and put our experience, knowledge, and dedication to work for your next investment loan.
