As real estate values continue to rise across the country, and many of the available homes are being purchased by investors rather than buyers looking for a home, it appears that investment property buyers are paying generously for available properties. A generous price is one that is viewed as way too high considering the amount of cash flow the rental property can generate. These types of properties are often not wise investments, compared to other choices that the investor could have made.
An experienced real estate investor will only purchase investment properties that are cash-flow based on conservative estimates. They are knowledgeable and experienced enough to know which type of property to purchase and which should be avoided. Many of the negative cash flow properties that inexperienced investors tend to purchase are typically among the fanciest properties in town. These types of properties will be difficult to rent and the investor is likely to lose much of their investment.
The primary reason that many investors pay a high price for a property is because the majority of them do not perform the proper financial analysis to decide whether the property is capable of producing a profit. Rather, they go into a deal hoping that the property they purchase will increase in value, and they can sell it for a profit. This rarely occurs, and the buyer is left with an investment property that will likely end up costing them money instead of making them more.
In order for a property to be labeled as a cash-flow property, it must have the potential to regularly earn the investor a profit. After the property has been purchased, many times simply for the down payment and closing costs, the investor will rent that property out for a sum that will guarantee that the mortgage payment is made and they will also make a profit each month. This is the type of property that is known as a cash-flow property. If you are considering purchasing an investment property, you should consider whether or not you will be able to make a profit each month. If you feel that the property you are interested in does not have this potential, you should walk away and continue looking.
It is estimated that only 50% of the properties available on the market today have the potential to be cash-flow positive properties. In reality, real estate investing is much more complicated than simply looking at numbers on a piece of paper. This is why it is highly recommended that you perform the proper research into the property and the area before you submit any offers. With the proper amount of research and due diligence on your part, you are bound to find a property that will net you a regular profit.