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How do I Choose the Best Positive Cash Flow Property?

Article Details
  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 06 February 2019
  • Copyright Protected:
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    Conjecture Corporation
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Positive cash flow property typically represents investment property where an individual or business can earn passive income. These income streams are known as passive income, meaning the property owner does not actively work the property to derive income. Common types of positive cash flow property include residential or commercial units. Selecting the best property includes obtaining a favorable mortgage for the unit, reviewing the payment history of current and new tenants, assessing the associated risk, and selecting a mix of properties.

Cash flow management is important when working positive cash flow property, hence the term positive. Owning real estate takes a lot of planning and preparation. Individuals and businesses must secure a mortgage for the property if they do not have the cash on hand to pay for the property. A mortgage requires buyers to find the lowest possible interest rate, have a good credit rating for the loan and keep down payments or processing fees as low as possible. This process represents the cost side of the positive cash flow property.

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Because most positive cash flow property involves renting homes, condominiums or other units to individuals and businesses, the payment history for these individuals is important. Some types of property may be sold with tenants currently in the property who do not have a positive track record for making timely payments. This will likely result in decreased cash flows and the possibility of having to evict tenants. The eviction process can be lengthy and sometimes overtly difficult, depending on the local and state laws for this process.

The attractiveness of cash flow property is also a factor for these passive income streams. Selecting the best property means finding a home or unit that has not been vacant long. The longer property does not have tenants, the more difficult it might be to get new tenants into the property. A property that has been empty for a long time may be in disrepair, for example, or it simply may be in an unappealing location.

Like any investment, cash flow property has some level of associated risk. Risk can be external to the property, such as the location, crime rate of the neighborhood, foot traffic for business units, and access to firehouses for emergencies. Investors are often unable to changes these factors, so they must limit these risks by selecting property in good locations. Internal risks include the credit application process, allowances for changing business units, and limiting the costs for repairing properties.

Another way to mitigate risks in positive cash flow property is to create a mix of commercial and residential property. This ensures that cash flows in one area can offset losses in another. Additionally, a market that has a glut of one type of property generally means investors can purchase these units at cheaper prices.

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