Even if you’re counting on rising property values to eventually make a profit on an investment property, it’s far more desirable to have a positive cash flow each month. If you’re losing money on a property every month, it may not take long until your future profits will have been lost. Owning investment property is much more enjoyable if you’re making money along the way.
Here are a couple of ideas for keeping your investment property cash flow in the black:
If you don’t already own your own home, your first goal should be to live in your first “investment" property. Interest rates and down payments are considerably lower for a primary residence, and you won’t have to deal with finding and managing tenants or absorbing the cost of an occasional vacancy.
Once you begin looking for your first “official" investment property, you’ll want to concentrate your search for less expensive homes, because they’re generally easier to rent for a profit than higher cost houses. You can also purchase two or three smaller homes for about the same cost as one larger one, thus giving you an even greater cash flow.
One of the easiest ways to achieve a positive cash flow is by obtaining a loan with a very low interest rate for the first several years. One example is known as a “payment option” loan, although these types of loans may not be available in all states.
These loans allow you to set up an optional minimum payment, which can result in low monthly payments, often for the first five years. During that period, your minimum payment will increase by a small amount every year, although it’s usually no more than a factor of 1.075. During the minimum payment period, your interest will still continue to accrue at whatever rate you’ve agreed on (such as 4.5%), but the interest that your payments don’t cover will be deferred. At the end of the first five years, that deferred interest is then added on to the loan, and the loan becomes a standard variable rate loan. Normally, that’s not a problem, however, because the property’s value probably will have increased enough to cover the deferred interest.
Another way to minimize monthly interest payments is through an interest-only loan. The period of most such loans is usually 5-10 years, during which time, you’ll be paying only the interest on the loan. To make this type of loan work most effectively, it’s best to sell or refinance the property by the end of loan period.
There are many other ways to realize a positive cash flow on your investment properties, depending upon the financing options available in your area of the country. But regardless of where you live, it’s always desirable to have your investment properties pay for themselves, and can move you a long way toward your goal of financial success as a real estate investor.
(c) Copyright 2004, Jeanette J. Fisher and Robert S. Kramarz. All rights reserved.
Jeanette Fisher, Design Psychology Professor, is the author of “Doghouse to Dollhouse for Dollars: Using Design Psychology to Increase Real Estate Profits, " the only book to reveal interior design secrets on how to make top dollar investing in real estate. For real estate and interior design psychology books, articles, tips, and newsletters: http://www.doghousetodollhousefordollars.com .
Robert S. Kramarz is a loan officer for a major loan brokerage. He has over 20 years experience in finance and business management and comes from a family a long background in real estate investing and banking. He specializes in providing financing for purchase of investment real estate. He can be reached by email at MrFunding@22cv.com . Further information is available at the website http://www.sweetloan.info .