The focus of this article is buying real estate as an investment, not as a place to live. Although the process of buying a property is the same, we want to focus on cash flow. Making money in real estate is all about cash flow. And by increasing your cash flow, the investment value will be greater overall.

1. Down Payment

The down payment is the money you have to give the bank, up front, if you want to get a loan. This amount ranges according to your credit history and type of property, but typically ranges from 10 – 30%. The rest of the cost is covered by the loan. To increase cash flow, a larger amount paid up front will lower your mortgage payments.

2. Mortgage Payment

A mortgage is the amount you own a bank or lending institute that loaned you the money to buy the property. Usually paid through monthly installments. They can be fixed loan payments (same amount every month) over longer time spans like 20 – 30 years. An adjustable rate mortgage (ARM) is not a fixed rate, and changes over a given period say 2-5 years, depending on loan terms and future interest rates. You can increase cash flow by making bi-monthly payments, or making the occasional larger payment.

3. Interest Payment

The payment of a loan typically involves two parts: 1. The interest payments: the amount of money that goes to pay the interest on the loan. 2. The amount you borrow: called the principle. You will see both of these payments on your monthly mortgage statements. In the beginning, most of your payment goes into the interest payments, because the loan amount is higher. Later in the loan, more goes towards the actual loan. So, the sooner you pay off the loan, the less you pay in interest. This increases your cash flow in the long run. Because you end up paying less for the property, instead of only paying for the interest.

4. Price Paid

The price of the property is not what you agree with the seller. This is due to the amount of closing costs, service fees, mortgage insurance, realtor fees and other costs of purchasing a property. Most of these fees are paid regardless of whether you get a loan or pay in cash. However, since many interest payments on loans are tax-deductible, it may benefit you to get a loan. This is where talking to a financial adviser or tax expert will help. When buying real estate these costs should be added on top of the actual agreed upon price.

5. Escrow

Escrow is a secondary company (often called a title company) that most real estate transactions involve. They are important to ensure a clean sale – limiting repercussions from faulty transactions and mis-management from realtors, banks, buyers, sellers etc. Items covered during the escrow may include: home and termite Inspections, mortgage insurance, home owner insurance, local taxes, listing fees, realtor fees, attorney fees, title searches, past property liens, condo fees, maintenance fees, closing costs, environmental site assessments etc. To increase your cash flow, you can always ask for the seller to agree to pay for some of these various fees. Or adjust your offer accordingly during the escrow process. However there are set time frames established that may limit certain negotiations.

6. Taxes

Taxes on real estate are generally called a property tax. The amount is usually derived out of a percentage of what the property is worth. For example, a 1% property tax assessment would mean you pay $1,000 for a $100,000 property. These are paid every year, and the amount varies according to zoning (i.e. commercial, industrial, residential, vacant land, agriculture etc). The amount you pay is not fixed and can change depending on changes in the properties assest value. However, some states have laws regulating how often they change your properties assessed value.

The second tax of importance is the capital gains tax. This is only charged if you sell the property at a profit. These include higher short-term (1 year), long-term (more than 1 year), and the primary residence capital gains tax. For the sale of a primary residence, there is no capital gains tax typically on profit up to $250,000 for single tax filers and $500,000 for married filers.

To increase cash flow make sure you challenge the local governments “assessed value” of the home. If you think it’s to high. You can also ask for governmental programs to lower taxes, or any deductions or audits that can be done. For example, installing energy-efficient appliances, switching to gas, adding solar etc.

7. Insurance

If you have a loan, the bank requires for you to buy and maintain insurance on the property. Usually it involves casualty and general liability like fire, flood, earthquake, tsunami, hurricane, personal injury etc. There is also mortgage insurance, which covers your mortgages if you can’t make the payments. Typically this depends on whether you meet a certain threshold for your down payment (say over 30%).

The specific insurance you need will change regionally (i.e flood, tsunami, hurricane, tornado etc) according to what your loan company demands. If you paid with cash, than it’s up to your own discretion as to what kind of insurance you purchase. Accept for commercial properties where a liability policy is typically required.

To increase cash flow, make sure you go to as many insurance companies as you can for quotes. Make sure you don’t get over covered. I have talked to many an insurance agent who tried to scare me into believing I not only needed “full” coverage, but a bunch of stuff I didn’t need as well. Also watch out for redundant insurance areas that may be covered by other companies (like home owner policies, credit unions or even credit cards.

8. Management Fees

When you have an investment property, someone has to manage it. If you do not know how to, or do not live near the property, than you will have to pay for someone to manage the property.

This typically includes hiring someone, or some company to find and keep renters, deal with complaints, find maintenance people for upkeep and repairs, handling paperwork and helping with taxes and insurance. The fee generally ranges from 8 – 15% of the rent you receive from most reputable property managers.

To increase cash flow, make sure the manager gets more than one quote for repairs, and doesn’t charge for miscellaneous fees (printing/mailing unnecessary documents, paying for repair quotes etc.) Also shop around before you choose an agent, and make sure you stand firm on what you’ll allow and not allow – like pets, how many tenants per room, dangerous manufacturing, storage of chemicals, sales of alcohol etc.

9. Maintenance

This includes everything to keep the property in good shape and rent-able. For residential it runs about 12 – 15%. For commercial property it can run 18-22% of yearly revenue. Especially for older buildings.

Of course, this is just an estimated figure and upkeep and repair work is itemized out over the life of the property. When you buy a condominium, townhouse or party-wall properties, there is a monthly fee that all unit owners pay, which covers most of the exterior, landscaping, site work, parking etc.

The best way to increase cash flows to do preventative maintenance every year or so. Things like cleaning the roof and gutters, cutting back overgrowth, cleaning filters, sealing any leaks, fixing drainage issues etc. Also, when you get a quote or bill read it carefully and if you have an issue, do something. So hire someone who is reliable and knows what they’re doing. Don’t ever trust renters to do maintenance or repair work, because they usually they wont do a thing, or do it wrong.

10. Utilities

Typically all utilities are paid by the renters on commercial properties. For residential properties, who pays for the utilities is up for negotiation. These may include: Electric, Gas, Water, Sewer, Communications,Waste and possibly Road Maintenance fees. I recommend never paying for these for residential properties. It’s human nature to waste what we don’t pay for. I once received a 1,000 dollar water bill, because the tenant never told me the pipes were leaking for two months.If they were paying the bill, I would have heard about it the first day! In this case saving on my utilities would have done wonders to that years cash flows.

Buying Real Estate: Ways to find the right property

This may sound complicated, and the first time around it is. I recommend working with a realtor, especially as a buyer. In many states, the seller pays the realtors commission fees. So, you get someone to work for you for free. However, find a good realtor because many of them aren’t. Shop around and do your due diligence by finding out what exactly they plan to do for you as their client.

As in every transaction, the above items might not all apply, but most will be a part of the process. Keep these in mind, as you make your decisions during the real estate process.

Research the history of the neighborhoods you’re looking at.
Talk to the neighbors and people in the area.
Go there at night, especially on weekends (some neighborhoods change at night).
What are the comparable rental rates nearby?
What kind of utility costs are there, and what are the rates?
How much are property taxes and will your purchase increase the taxes?
What kind of loans will you qualify for?
Don’t be afraid to negotiate, up front, before you enter escrow.
Does the owner have good maintenance and historical records.
Make sure the place works for you, and get estimates if you have to make major changes.
Contact local regulatory offices to get the inside scoop to make sure there isn’t anything that can come back to bite you. These include; planning and building departments, taxation offices, EPA, Department of Health, business departments, local libraries etc.