What is Cash Flow in Real Estate? • Benzinga

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All real estate investments have the same end goal: to build wealth for the investor. However, the methods investors choose to go about building this wealth may differ. Some real estate investors are home flippers who buy properties for cheap, renovate them and sell them at a profit. Another type of real estate investor buys rental properties and holds on to them while they generate income, which is known as cash flow. Long-term real estate investors prefer properties that offer cash flow because they can earn residual income while the property appreciates in value. With that said, cash flow only works if it’s a positive cash flow.

What Is Cash Flow?

Cash flow is not a river of cash that flows to an investor. It is the amount of money generated by an investment after all the expenses are taken out. The key to any investment is positive cash flow. For example, if an investor buys a $1,000,000 building that takes in $100,000 per year in rental income, but they have annual expenses of $120,000, it has a negative cash flow of $20,000 and loses money for the investor. This direction is the opposite of what investors are looking for.

What Is Cash Flow in Real Estate? 

Cash flow, specifically positive cash flow, is the ultimate goal of any long-term real estate investment. Positive cash flow in real estate happens when the investor gets more out of the investment on an annual basis than they spend to maintain it. Imagine purchasing the building in the example above and increasing the annual revenue from $100,000 to $150,000. Subtract the $120,000 annual expenses, and you have a positive cash flow of $30,000 per year or $2,500 per month. Needless to say, real estate investors want the highest positive cash flow possible. 

What Subtracts from Real Estate Cash Flow?

Any expenses associated with owning and operating investment property subtract from positive cash flow. This fact underscores the need for effective, professional management. The failure by an investor (or their chosen management company) to stay on top of expenses and more importantly, minimize them, has a negative effect on the investment’s cash flow. Examples of these expenses include:

  • Management
  • Maintenance
  • Debt service
  • Capital expenditures (capex) reserves
  • Property taxes
  • Utility costs
  • Insurance
  • Tenant delinquency
  • Vacancy loss
  • Legal expenses

A component that almost all these expenses have in common is late fees. Late fees are wasted money, and, in the case of property taxes, the penalties for late payment can be quite punitive. While interest fees and late charges for services are not as high as late property taxes, they can add up if bills aren’t paid on time. It’s a rare investment that can generate a positive cash flow if it’s just wasting money on late fees and penalties.

The potential for inadvertent losses is why management is so critical and is listed as the 1st expense. On one side, management eats into cash flow. But it’s also the investor’s 1st line of defense against loss of revenue and cash flow. Management handles the accounting and bill paying associated with the property. The simple act of getting all the invoices paid on time without late fees goes a long way towards protecting investor cash flow.

Vacancy and Delinquency

Aside from expenses, vacancy loss and tenant delinquency are positive cash flow killers. Cash flow is, after all, a measure of how much money a property is making. When it comes to most expenses, investors can write them off. Write-offs aren’t allowed for vacancy loss. That means every day units sit empty in an investor’s property, the investor is losing money they will never recoup. 

Tenant delinquencies can be just as crippling. If the current tenants are not paying their rent on time, the property may not generate cash flow. What’s worse, investors may have to dig into their own reserves to make up the revenue shortfall caused by excess delinquencies. That’s literally the opposite of positive cash flow.  

Solid management can mitigate these expenses by being proactive about renting out vacancies, collecting rents on time and paying bills on time. Whether the investor chooses to manage the property themselves or hires outside management, the quality of the management goes a long way towards determining how much cash ends up flowing into the investor’s pocket. 

How to Add to Cash Flow

The good thing about cash flow is that an investor (or their management company) can take a number of positive steps to increase cash flow. At the end of the day, cash flow is revenue. Property upgrades, such as adding a swimming pool or remodeling units with more luxurious fixtures, can increase rental revenue, which will increase cash flow. Of course, those kinds of upgrades cost money too. 

Investors can take other simple, cost-effective measures to increase revenue. Raising laundry fees, monetizing parking and making fair market rent increases on an annual basis are all proven, inexpensive ways for property owners to boost their cash flow. 

What Are the 1% and 2% Rules?

The 1% and 2% rules are basic measures of how effectively an investment is performing. They dictate that an investor should earn a minimum of 1% or 2% of the total cost of an investment on a monthly basis. For example, a $1,000,000 building should generate between $10,000 and $20,000 per month at a minimum. Properties that don’t reach this threshold are unlikely to generate enough income for the investor to have a positive cash flow. 

How to Invest in Real Estate Without Worrying About Cash Flow

If the idea of identifying solid long-term investments and then managing them sounds like too much trouble to you, you’re not alone. It really is a lot of work. Fortunately, you can invest in real estate without having to worry about this. You can buy into a real estate investment trust (also known as a REIT) or invest in a real estate crowdfunding platform

Real Estate Funds

REITs are managed funds that own and operate large portfolios of investment real estate. The advantage of investing in a REIT is that the properties in its portfolio have been carefully selected specifically for their ability to, and history of, generating positive cash flow for their investors. Real estate crowdfunding works in a similar fashion, where a majority (if not all) of the properties in the portfolio are pre-selected by an established real estate professional. Both offer investors the opportunity for a “set it and forget it” type of real estate investment that should generate positive cash flow. 

Choose Simple Investments

Another way to invest in real estate without worry about cash flow is to keep it simple. Investing in apartment buildings is expensive, and managing them yourself can be even harder. As an individual investor, it’s much easier for you to start small and buy 1 unit, such as a condominium or a duplex where you can live in 1 and rent out the other. It will be much easier for you to stay on top of and manage 1 unit than it will be to deal with a multi-unit apartment building. 

You can also think outside the box. Apartment buildings are not the only types of investment properties that generate positive cash flow. While they may not be as glamorous as luxury apartment buildings, warehouses and parking lots are low-risk, low overhead investments that can generate a ton of cash.

Benzinga’s Best Real Estate Investment Platforms

If you are interested in putting money into a REIT or a crowdfunding enterprise, your 1st and most obvious question might be which to invest in. While it’s always important to do your own research and consult with financial professionals before investing, Benzinga has an extensive array of resources for would-be investors. Here is a list of Benzinga’s preferred REIT and crowdfunding platforms.


Get Started

securely through Arrived Homes’s
website

Fees

1% asset management fee

1 Minute Review

Arrived Homes is the latest player in the real estate investment industry. Differing from many of their counterparts, Arrived provides investment opportunities in the single-family homes, with a minimum investment of just $100.


Get started

securely through CrowdStreet’s
website

Minimum Investment

$25,000

1 Minute Review

CrowdStreet is a commercial real estate investing platform where people can invest directly in commercial projects. Unlike a brokerage firm, CrowdStreet isn’t a middleman. Instead, the platform acts as a marketplace where investors can pick and choose the best deals for their time horizon and strategy.

Available investments range from family living spaces to office buildings to storage facilities and investors can sign up for a free membership. Your investment options are limited to what’s live on the Marketplace and you’ll need capital to build a diverse real estate portfolio. Only accredited investors can access deals through CrowdStreet.

Best For

  • Investors looking for diversification away from stocks
  • Real estate investors interested in new opportunities
  • Accredited investors with lots of capital at their disposal
Pros

  • Unique opportunities available
  • Makes real estate accessible and understandable
  • Investors can devote capital to both debt and equity offerings
  • Offers quality education materials and answers to FAQs
Cons

  • Real estate is highly illiquid
  • Most properties require a minimum $25,000 investment
  • You’re limited to what’s on the CrowdStreet Marketplace

1 Minute Review

DiversyFund isn’t your average crowdfunding platform. You’ll find that the company puts a twist on the traditional everyday crowdfunding platform, beyond anything you can find online with a simple Google search. You only have to look under DiversyFund’s skin one layer to surmise that DiversyFund is a conscientious developer and sponsor and helps hedge risk through improved vetting.

DiversyFund offers a multifamily real estate investment trust, the DiversyFund Growth REIT, and its main goals are to increase cash flow and resale value. It’ll automatically give you access to multi-million dollar real estate assets.

Best For

  • Those looking for an alternative investment beyond stocks and bonds
  • Individuals who aren’t sure they want to be landlords in the traditional sense
  • Investors who aren’t accredited
Pros

  • Only need to pony up $500 to get started
  • Open to investors all over the world
  • No expensive broker fees
Cons

  • You’ll only be able to access “blind pool” investments, which means that you can’t opt out of specific properties
  • There’s only one real investment option, the DiversyFund Growth REIT

1 Minute Review

Groundfloor is open to non-accredited investors and private individuals looking for active real estate alternative investment. Groundfloor has great volume with more than 10 investments. 

Individuals with small portfolios will also like the low $10 minimum and 0 investor fees. However, most of the loans are given to house flippers, and there is a risk of borrowers defaulting on their loans. 

Best For

  • Non-accredited investors: It is a good option for non-accredited investors who want to invest in an individual capacity.
  • Private investors with small portfolios: Groundfloor charges a relatively small premium of $10, which private investors with small portfolios find attractive.
  • Active-investors: Groundfloor is also ideal for investors who want to actively maintain and control their real estate portfolio.
Pros

  • Charges the lowest minimums in the industry
  • 0 investor fees
  • Open to non-accredited investors
Cons

  • Offers no bankruptcy protection
  • High rate of an uncured default
  • Many loans are for judicial-only states


Get started

securely through Acre Trader’s
website

Minimum Investment

Between $3,000 and $10,000, depending

Fees

0.75% and 1% per year based on asset value

1 Minute Review

AcreTrader is an investing platform that makes it easy to buy shares of U.S. farmland and earn passive income, starting in just minutes online. The platform features actual parcels of farmland where investors can choose offerings to participate in based on their investment preferences.

Farm types range from Midwest Row Crop Farms to California Almond Orchards, but you don’t need to be an agriculture expert to get started. They have a very thorough underwriting process to vet the offerings, and present information in an easy-to-understand offering page on their website where you can get started with as little as $10k and 10 minutes.

Best For

  • Investors looking for diversification away from stocks and other traditional assets
  • Real estate investors interested in new opportunities
  • Accredited investors with multi-year investment horizons
Pros

  • Real, uncorrelated asset class with a history of consistently strong returns
  • Highly qualified team with best-in-class underwriting practices
  • The platform has some of the lowest fees that you’ll find in real estate investing
Cons

  • Investment minimums are typically $10,000+
  • Only open to accredited investors at this time


Get started

securely through FarmTogether’s
website

Minimum Investment

$10,000

Fees

1% of your total investment + 1% per year in asset management fees

1 Minute Review

FarmTogether is a crowdfunding investment platform that allows you to pool money with other investors for agricultural opportunities. FarmTogether does have strict requirements for who can and cannot invest on the platform. 

FarmTogether’s platform is new and offers limited educational offerings. It doesn’t currently offer a mobile app, and it requires higher-than-average account minimums. However, as a newer platform, FarmTogether has potential that shouldn’t be ignored,  especially if you’re a higher-value investor looking for novel ways to invest directly in farmland real estate. 

Best For

  • Investors who want to invest in farmland real estate
  • Long-term investors who don’t mind investing in illiquid assets
  • Investors with a net worth of at least $1 million
Pros

  • Can invest directly in agricultural real estate
  • Can combine your investments with other investors for larger returns
  • Offers an easy-to-use platform that’s simple enough for total beginners
Cons

  • Higher-than-average minimum investments when compared to standard brokerage platforms
  • No mobile app currently available
  • Educational offerings are limited


get started

securely through Realty Mogul’s
website

Minimum Investment

$5,000

Fees

Vary based on investment type

1 Minute Review

This unique online platform enables investors to handle the entire commercial real estate investing process right from their RealtyMogul dashboard. With rigorously vetted property listings, expertly managed REITs, and a commitment to providing top-notch service and support to its members, RealtyMogul makes commercial real estate accessible to everyday investors.

Best For

  • Newer accredited investors who want access to pre-vetted properties
  • Non-accredited investors seeking consistent cash flow from well-managed REITs
  • Experienced real estate investors who want access to deal-specific information that allows them to perform their own due diligence more easily.
Pros

  • Do everything from finding the investment property through to signing the legal documents and monitoring your portfolio, all in one platform.
  • All properties are pre-vetted through RealtyMogul’s transparent and rigorous due diligence process.
  • Investment minimums as low as $5,000
  • Keep track of investments with regular updates posted directly to your dashboard
  • Automated investing
Cons

  • Individual property marketplace is only open to accredited investors
  • Does not offer portfolio management


Get started

securely through stREITwise’s
website

Minimum Investment

$5,000

1 Minute Review

Looking to diversify your portfolio and get into real estate? A real estate investment trust (REIT) that owns income-producing real estate may be a great place for you to start. Streitwise is a REIT that specializes solely in commercial real estate and has a low entry investment requirement of $5,000. Based in Los Angeles, Streitwise was created in 2017 by three veteran real estate investors who were frustrated that there wasn’t a good option for unaccredited investors to get into the commercial real estate market.

Streitwise focuses on investing in low-risk rental commercial real estate aimed at providing clients with consistent high-yield returns. The team invests in markets that are steadily growing and offer low-risk potential outcomes. While they’re still young and growing, the founders have built their business based on solid experience coupled with a vision for the future of investing. If you’re looking to diversify your current investment portfolio but feared real estate was too lofty a goal, Streitwise is worth exploring.

Best For

  • Investors looking to diversify
  • Investors with less than $200k in annual income
  • Passive traders
Pros

  • Consistent quarterly dividends
  • Low, transparent fees
  • Low investment minimum
  • Convenient and easy to use
Cons

  • Projections are uncertain
  • Limited portfolio
  • Limited technology

Getting the Best Outcome in Real Estate Investment

When it comes to long-term real estate investing, a positive cash flow is the most desirable outcome possible. Properties with positive cash flow give investors the opportunity to service debt, pay off expenses and make money all while the property appreciates in value. It’s the ideal situation, but it can only exist if the investment is carefully chosen and extremely well managed. 

FAQ’S

What does cash flow mean in real estate?

Cash flow measures how much of the income generated by a property is flowing to the investor after expenses (management, property taxes, debt service, utilities, insurance) are taken out. Long-term real estate investors are looking for properties with a positive cash flow. However, positive cash flow is not something that happens by accident. Investors must choose properties carefully and see to it that they are effectively managed. Another, less labor-intensive method of investing in properties with a positive cash flow is to buy into a REIT or real estate crowdfunding platform. 

What is the 2% rule in real estate?

The 2% rule in real estate is a simple rule of thumb that says a property should generate a minimum of 2% of the original investment cost on a monthly basis. That means a $1,000,000 property should be earning at least $20,000 per month before expenses. This rule of thumb is important because historically, investments that don’t conform to the 2% rule will not generate positive cash flow for investors. 

DiversyFund accelerates your wealth creation by reinvesting cash flows from the properties — the DiversyFund Growth REIT is a public non-traded REIT designed to build wealth by investing in multifamily real estate and intends to build wealth over an approximate 5-year timeline. You don’t have to be an accredited investor to invest in Diversyfund. Open a Diversyfund account today.

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