Cash Flow Neutral

Cash flow refers to the money transactions taking place, in terms of inflow and outflow. Cash flow can be positive, negative or neutral. It is positive when the inflow as income is higher than outflow and expenses. Negative cash flow refers to a situation when the income is lower than the expense and neutral cash flow refers to a state when the income matches expenses. In the property sphere, cash flow neutral implies that the rental income matches the expenses involved in holding a property. Since they are equal it means that the rent exactly covers the expenses including maintenance charges, loan installment, insurance, and other charges.

Neutral cash flow properties are suitable for people who wish to own multiple properties since it will cost them nothing town one more. That is, the expenses of the property will be exactly met by the income it brings. It is such properties that help people build a property portfolio with ownership of multiple units.

How Cash Flow Neutral Helps

  • Helps to add a property without any expense-since the dues pay for themselves through rental earnings
  • Easy to expand asset base with a property portfolio, since it comes at no additional cost
  • Holds promise of becoming cash flow positive over time. This happens when the value appreciates and rents increase.
  • The best way to own property and secure a future.

Cash flow neutral properties sound great but banks always look at the asset base while clearing a loan for a new property since they take into account unforeseen expenses and their impact to restrict purchasing power. However, high rent is perceived positively by lending institutions and thus it becomes easier to gather the resources needed for buying a property.
Cash flow neutral properties are universally those which bring a total return of 7%, since this amount can cover all the expenses or cash outflows. Though an initial capital growth may have to be sacrificed, once the mortgage loans are paid off, the cash flow will move from neutral to positive and become a source of income.

Cash flow is the key to successful property investing and needs to be handled in a manner that ensures a neutral if not positive cash flow. This requires research, a proper calculation of expenses and the highest rent that can be earned to match all the expenses with some margin for major breakdowns and repairs. Provision will also have to be made for a change in interest rates which cannot be ruled out. If after all these, the cash flow is neutral, the property qualifies as the next addition to the existing lot of properties. The return will accrue in the long term in the form of value appreciation and higher rents, lower interest rates, and post mortgage, all contribute to turning it into cash flow positive.

Cash flow neutral properties do stand the risk of becoming cash flow negative, which can create problems for the investor who may be cash strapped and will have to find ways of funding the gap between rental income and expenses.

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