It’s a common mistake and misconception to think that the pricier your investment, the more money you rake in — although it’s an understandable error on the part of any real estate investor. Think again on whether or not the numbers would be proportional, basically; they won’t. Why? What an investor has to consider is this: it’s not about whether or not the real estate’s going to be appealing to any tenant; instead, an investor has to wonder about the cash flow.
Will the Real Estate Cash Flow Be Positive — or Negative?
This is a question you can ask regardless of the price of the rental home, quality of the rental home (specifically related to flipping houses, of course!), or location of the rental home. Hands down. Priority one for any real estate investor is to ensure that the properties actually pay for themselves. This means you’ve got to not only find the right renters, but the right properties aligned with those renters, and believe me when I say this: smart real estate investments don’t just happen overnight.
Case in point: even properties these days at really low prices, such as rent-to-own homes, for example — while getting high demand and visibility in the market — end up not paying for themselves at all. The reason why is due to the fact that the expenses in maintaining rental properties end up choking out the cash flow coming in, and what happens? You, as an investor, are swimming in hot water (and not the dough). And, no, this ain’t no hot tub or jacuzzi.
Don’t Ever Use Your Own Savings to Cover Any Negative Cash Flow, in Other Words
Seriously, that takes the “hot water” metaphor to a whole new level when you think about it.
Here’s some words of advice: go with a moderately priced area when investing in homes. Stay away from the ‘luxury’ stuff. Why? For one thing, even with a higher rent, typically a real estate investor will fork over more presidential flashcards for the more upscale property, leaving the poor sap negative on operations with not enough cash flow to cover the rest of the financial deficiency.
Hence, When Thinking of Positive Cash Flow, Don’t Automatically Think “Higher Rent”
It’s all proportional when you think about it. Be strategic. Look for the homes in high-quality neighborhoods that don’t necessarily sell for the higher prices. Look for those homes that will net you more money in your pocket. That way, the hot water’s not going to burn you. You’ll just relax in the real estate bubbles.