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Positive Cash Flow with Florida Real Estate

Florida real estate positive cash flow returns

With very few exceptions, we do not like to see anyone invest in real estate unless there is a positive cash flow. If you are going to gamble, you might as well go to the track or buy stocks.

Positive Cash Flow - The Holy Grail of Real Estate Investing

If you read any of the older books on real estate investing you will find a scenario that goes something like this.

- You buy a home for $80,000 with 20% down and then rent it out for $1,000 a month.

- The homes are never in Florida and the taxes and insurance are low.

- The homes are in great shape and there are never tenant problems.

- You make 20%+ on your investment while somebody else pays off your mortgage.

Nice story isn't it? Seems simple enough. But, until recently, this was just a fairy tale. Now, it is more like a documentry. It is a completely different real estate investor market in Florida and it is amazing.

Technically speaking, anyone can be cash flow positive, you just have to put down enough money and presto - you are cash flow positive.

I know investors that have bought rental properties for $150,000 and rent them out for $900 a month. After expenses they are making about 3% on their investment. They seem happy enough. Yet I have to wonder why they bother to own real estate. Unless, they plan to kick the tenant out in a few years and move in. Sometimes clients buy a home for retirement but are just not ready.

What an investor needs to ask is "Can I buy a property that will give me a positive cash flow and a return on my investment that would make it a better choice than investing in other assets or equities?"

Investing versus Speculating

Experienced investor's will tell you that you should never buy a rental property that does not at least pay for itself. That is why most experienced investors I know rarely buy raw land. Unless you are growing something on it, using it for pasture, pumping oil out of it or digging up gold, it is not producing income.

When you buy something that does not generate income, with the hope that prices will rise in the future so you can sell it at a profit, its called speculating and not investing.

The Fine Line

There is line between investing and speculating, but it is not always so clear.

Let's say you buy a home in Cape Coral for $90,000 and put down $30,000. Based on current rental rates, you should more or less be in a neutral cash flow position after taxes, insurance and maintenance.

Five years later you sell the house for $120,000. You have earned about 15% a year on your investment. You initial thought is that this will beat the pants off of anything else out there.

Is this realistic? Remember, this is a whole new real estate market we are working with. But, let's not jump the gun. This still might be a good investment.

Is it possible that the house would only be worth $100,000 after five years? After all, there are no guarantees. An appreciation of only $10,000 after 5 years is ultra-conservative. Under those circumstances, this investment would yield about 6%. Remember, you only put down $30,000.

Now I am a bit more comfortable. If this house barely moves at all, I could end up earning about 6% a year. If I get a bit more appreciation, I can see a more generous return.

For those of you looking at alternative investments, this worst case scenario does not seem bad at all. After all, in five years your stock, mutual fund or indexed annuity might be worth less than you paid for it. You would need to damn lucky to average out 6% a year from the stock market over the next five years. Did you ever notice that the word "luck" comes up a lot when talking about the stock market?

You Can Do Better

The aforementioned example uses prices that might be paid by an amateur investor. I wanted to use home prices that just about anyone can get without much difficulty.

We do this for a living. We have a lot of homes that are $70,000 to $80,000 that rent for $900 a month. Actually, we have seen condos for $50,000 that rent for $900 a month.

At $70,000 with a $900 a month rent and the same $30,000 down, you should be netting out close to 14%. Sell the house in three years for $80,000 (not unreasonable) and you would have netted close to 25% a year on your investment.

Now you know why you want to invest in real estate. Now, you know how you are going to retire even though the financial downturn of the last year or so killed your retirement accounts.

Different Strokes for Different Investors

Not everyone wants to have rental homes. Some of you want a simpler and cleaner rental property. Something that is very easy to manage.

If that is your preference, I might suggest a condo rental.

I will tell you that some investors do not like condo investments. There are pitfalls you must be aware of. But, if you know what to look for, you can find a well priced unit that is easy to rent. Plus, you can take a service contract out for a nominal amount that will take care of all the appliances as well as the basic plumbing and electrical work. Everything else is handled by the condo association.

I suggest you read our article on Condos As Investments. It might be just the thing you are looking for.

Give us a call and we will be glad to discuss all opportunities with you.

 

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The information on this web site is provided as a guide for general informational purposes only and is not intended to be tax or legal advice. It is deemed reliable but not guaranteed. Please consult with your own attorney, tax advisor and/or accountant for specific advice. Martin Unger is a licensed sales associate in the state of Florida and works with Royal Florida Realty.