It’s one of the hottest words in real estate investing, but really, why all the fuss about cash flow? Well, here are a few of the reasons that cash flow is getting so much attention these days.
Where has the cash flow gone?
Home prices in Canada have risen significantly over the last ten years. A look at the graph below shows Canada’s House price to rent ratio, which is the average price of a home divided by the annual average rents collected. As you’ll notice with the blue line, the price of homes has increased dramatically, and the rents have not proportionately followed suit. With the prices high and the rents…not so high…the cash-flowing property has become more of a rarity, thus making it more of a “big deal”. This is why it is important to locate key markets where rents have increased alongside home prices.
It gives, doesn’t take
The most obvious benefit of cash flow is that it actually puts money in your pocket each month instead of taking it away. With Christmas around the corner, gas well over a dollar a litre, and a mortgage (or two) on our own property, nobody wants to throw money every month at an investment property just to keep it afloat.
Cash flow makes bankers happy
Financing in Canada has become more of a challenge of late, and cash flow can play a key role in helping you finance additional investment properties. In most circumstances, the bank will classify the cash flow as additional monthly income and this will help your ability to debt service your property.
If you have multiple investment properties (typically 4 or more) and they have strong cash flows, some banks will consider those properties as non-liabilities when applying for a new mortgage. This means that the bank will act as if the new mortgage you are applying for is the only mortgage you have to be able to debt service. This method of financing is a powerful tool and is used by most seasoned real estate investors. What many beginner investors don’t realize is that it is possible to own numerous investment properties with a modest income. But remember, Cash flow is key!
So next time you hear someone go on and on about “Cash flow,” you’ll know why.