Cash Flow Properties At A Glance

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Generally speaking, there are two ways by which you can get positive cash flow from the ownership of a rental property. One situation is when the capitalization rate of your property is higher than the annual loan constant with the loan-to-value ratio or LTV calculated at 70 to 80%. The other way is when the LTV is at an unusually low figure, such as 60% or lower.

To determine whether or not you can realize positive cash flow from your property, you should multiply your loan-to-value ratio by your annual constant and if the result is lower than your cap rate, you have a positive cash flow property on your hands. The capitalization or cap rate on the other hand, is the annual net operating income of a rental property divided by its value. A piece of property valued at $1,000,000 for example, with a net operating income of $60,000 per year has a cap rate of 6% ($60,000 ÷ $1,000,000).

In order to determine the net operating income of cash flow properties, you should deduct the operating expenses-although not the mortgage payments-from the gross income. In this case, the cap rate is defined as the cash-on-cash return that you will get as a result of having no mortgage on the property.

The annual loan constant is also an important consideration with regard to cash flow properties. This figure is derived by dividing the sum total of the annual mortgage payments-including both the principal and interest-by the mortgage balance. In a 30-year fixed rate mortgage arrangement for example, the annual loan constant would be a little higher than the mortgage interest rate at the beginning of the mortgage period, typically at 7.25% is 8.14%.

Keep in mind that the shorter the remaining term of your mortgage, the higher the constant will be. When faced with an adjustable-rate mortgage, you should figure out the worst possible lifetime cap payments simply because there is no way of knowing whether or not the rates will increase after closing.

For purposes of determining cash flow properties, you should also consider all of the time and effort that you have put into the said property. Most-if not all-small investors typically undertake all of the management, repair, and improvement work necessary for the property. While you do indeed save some money in this manner, you cannot really consider this as positive cash flow, since you would have gotten paid for doing the same thing for other people. You could have also used the time that it took to do that work by earning extra money at your job or business.

By the same token, if you had invested your money into stocks, bonds, or commodities, you would not have had to put in the time to manage, repair, or rehabilitate those properties. The bottom line is that considering the money that you save by doing all the work on the property yourself as investment returns from the property is somewhat erroneous thinking.

Ephren W. Taylor II first revealed his extraordinary knack for making money at age 12 and he hasn't slowed down since. He was a self-made millionaire while still in his teens. In his twenties he became the youngest African-American CEO of any publicly traded company ever, City Capital Corporation (CTCC). Today Taylor and City Capital oversee tens of millions in assets for clients ranging from entertainment icons and pro athletes to church members and private companies. He is a dynamic speaker and author of the best seller "Creating Success from the Inside Out." Learn more at CashFreeInvesting.com, IRACashFlow.com or Ephren.com.

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