You can think of cash flow investing the same way you think about dividends with stocks. At some interval, whether it is monthly, quarterly, semi-annually or annually, you will receive regular cash distributions from your investment. You are buying a portion, or all, of an asset that can be leased or otherwise used to generate income.
With real estate investing, cash flow is the result of proceeds from rent payments. Let’s take a multi-family apartment building as an example. Say the property has 50 units and each unit rents for $1,000 per month. If we assume an expense ratio of 40%, the net income per month on that property is $30,000. While it is always a good idea to keep some portion of that net income in reserves, the remainder of the income is available for distribution, in this example, $28,500.
HERE IS A SAMPLE SIMPLIFIED CASH FLOW STATEMENT:
Number of Units 50
Monthly Rent $1,000
Total Monthly Rent $50,000
Expense Ratio 40%
Net Income per Month $30,000
Reserve Ratio 5%
Distributable Income Per Month $28,500
Real estate is just one type of cash flow investment. Other examples include investing in ATM machines or laundromats - purchasing any asset that provides regular income.
Although cash flow investing is a great strategy for the right investor, there is always the possibility that the investment will not cash flow (for example, there could be unforeseen vacancy that reduces your rental income below total expenses, among other possibilities). Performing proper due diligence and fully understanding the possible outcomes will help investors determine the right investments for them.
Source: Realty Mogul