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Even if you’re counting on
rising property values to eventually make a profit on an investment property,
it’s far more desirable to have a positive cash flow each month. If
you’re losing money on a property every month, it may not take long until
your future profits will have been lost. Owning investment property is much
more enjoyable if you’re making money along the way.
Here are a
couple of ideas for keeping your investment property cash flow in the
black:
If you dont already own your own home, your first goal should
be to live in your first "investment" property. Interest rates and down
payments are considerably lower for a primary residence, and you wont have to
deal with finding and managing tenants or absorbing the cost of an occasional
vacancy.
Once you begin looking for your first "official" investment
property, youll want to concentrate your search for less expensive homes,
because theyre generally easier to rent for a profit than higher cost houses.
You can also purchase two or three smaller homes for about the same cost as one
larger one, thus giving you an even greater cash flow.
One of the
easiest ways to achieve a positive cash flow is by obtaining a loan with a very
low interest rate for the first several years. One example is known as a
payment option loan, although these types of loans may not be available in all
states.
These loans allow you to set up an optional minimum payment,
which can result in low monthly payments, often for the first five years.
During that period, your minimum payment will increase by a small amount every
year, although its usually no more than a factor of 1.075. During the minimum
payment period, your interest will still continue to accrue at whatever rate
youve agreed on (such as 4.5%), but the interest that your payments dont cover
will be deferred. At the end of the first five years, that deferred interest is
then added on to the loan, and the loan becomes a standard variable rate loan.
Normally, thats not a problem, however, because the propertys value probably
will have increased enough to cover the deferred interest.
Another way
to minimize monthly interest payments is through an interest-only loan. The
period of most such loans is usually 5-10 years, during which time, youll be
paying only the interest on the loan. To make this type of loan work most
effectively, its best to sell or refinance the property by the end of loan
period.
There are many other ways to realize a positive cash flow on
your investment properties, depending upon the financing options available in
your area of the country. But regardless of where you live, its always
desirable to have your investment properties pay for themselves, and can move
you a long way toward your goal of financial success as a real estate
investor.
(c) Copyright 2004, Jeanette J. Fisher and Robert S.
Kramarz. All rights reserved.
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