Comparing the cash flow of investment properties is difficult, even for experienced real estate investors.
There are three primary ways that an investor makes money in real estate: cash flow, equity build up and appreciation. Building equity through the pay down of the mortgage and appreciation are generally well understood by most investors. Cash flow is much more ambiguous.
Conceptually, it is simple. Cash flow is the difference between the checks you write each month and the checks you deposit. However, many sellers of investment property have a much looser definition of cash flow, or make very unrealistic assumptions about it, and can easily mislead an unwary investor. Most commonly, the key elements of cash flow that are mis-stated are rents which are over estimated or expenses with are understated or omitted.
Bluefields Capital provides complete cash flow analysis on every property that we offer for sell. We do not include depreciation benefits in an attempt to derive after tax cash flow, as it makes the cash flow numbers look better. While this tax benefit is real, the amount of benefit to each investor varies widely, as each individual investor’s personal tax situation is different. We also do not include rent appreciation in our analysis. Our cash flow formulas are very conservative. The following are the factors that we include in our cash flow analysis:
- Principal & Interest
- Property Taxes
- Hazard Insurance
- Management Fee
- Vacancy Rate
- Maintenance
- Rent
