In this week’s Strata Knowledge series we are going to talk about an investing method that will grow your wealth and give you financial freedom like no other, Cash Flow Investing.
When stocks were plummeting in the great financial crisis of 2008, there were a few savvy investors who could watch the fall on TV and still have a good night’s sleep. They were the ones who were cash flow investing. Fascinating right? This is the certainty that cash flow investing can offer you.
What is cash flow in CRE?
In the context of commercial property investing, cash flow is the result of proceeds from rent payments. It is the amount of money you bring in after collecting all income, paying all expenses and setting aside cash reserves.
If a property generates more revenue than it costs to maintain it, it has positive cash flow. If it costs more money than it earns, it has negative cash flow.
Why is cash flow investing so powerful?
- Creates a passive income source - Cash flow investing generates a stable income at regular intervals that can help you pay off expenses.
- Creates more investment opportunities - Reinvesting the cash flow into other opportunities can exponentially increase your returns.
- Creates a safety net - Having a steady income source creates a financial safety net that can help you tide over difficult economic times.
- Creates long term wealth - Not only does investing in CRE give you a positive-cash flow asset, it also builds wealth as the value of the asset appreciates over time.
How to calculate if a property can generate positive cash flow?
A simple cash flow calculation can illustrate the potential of commercial property as an investment. Here’s the example of a pre-tax cash flow statement for an office building:
|Cost to purchase the asset||Rs. 1,00,00,000|
|Total monthly rent||Rs. 80,000|
|Expense ratio (Maintenance, Property Tax, Insurance )||10%|
|Monthly Expenses||Rs. 8,000|
|Net income per month (Rent - expenses)||Rs. 72,000|
|Monthly Reserve||Rs. 1,500|
|Monthly Cash Flow||Rs. 70,500|
What to look for before investing in a cash flow positive asset?
- Tenant quality - Having a Grade-A/MNC tenant is ideal as they are unlikely to default on rents and will almost certainly honour contracts.
- Long lease periods - Long leases periods help to tide over market downturns. Additionally these leases will have built-in rental escalations of 5% per year or 15% every 3 years. These escalations are essential to beat inflation.
- Age of the property - Due diligence is needed regarding the age and condition of the property to avoid extra expenses on upgrades, repairs, and maintenance.
- Returns vs EMI - If you are planning to take a loan to buy the property, make sure that the cash flow is enough to cover the interest payments. This way, you will have essentially bought the asset for free.
Cash flow investing when done right can be one of the most rewarding ways to invest. At Strata, we help people make fractional investments in Grade-A, cash-flow positive properties for as little as 25 lakhs. To know more, visit strataprop.com.