Cash flow is a vital element of the power of real estate investments. If you don't have a property management company on your investment team - get one now. Properties that are managed well are properties that realize net operating income growth every year. This takes expertise and a lot of time. Unless you are an expert in property management, there is no way you can get a property to perform unless you have had the education and training to do this. This starts by having a sound management plan, as to how you are going to increase your net operating income. The basic principle behind every sound property manager, should be the reduction of expenses and the increase to income. Sounds simple, but it takes real expertise to do this.
Like a lot of real estate investments, cash flow provides you with passive income that can be tax-free after depreciation. The distinct advantage that multi-family real estate has over other types of real estate, for example commercial is that cash flow, can be manipulated quickly.
In commercial real estate leases can be for many years. If I'm the landlord, that is a scary proposition. While the security of a long-term lease is nice, it doesn't allow you to take advantage of fluctuations in the market. Meaning, as rent levels go up you can adjust your rents accordingly. Thus minimizing any loss you may receive to being locked into long-term leases. Let me explain: Suppose you own a piece of commercial office space and sign a lease with a resident at the going rate of $4,000. per month for three years. One year later, demand increases and the going rate is now $4,500. per month. Because you have signed a long-term lease, you cannot take advantage of this upswing. Essentially you would be leaving at a minimum $500. per month on the table every year. That works out to $12,000. in lost income from just one commercial space.
In multifamily investments leases tend to last normally six to twelve months. This allows for constant adjustment of rents - up or down, if necessary - to maximize market values. Additionally, multi-family apartment buildings tend to have more density than commercial buildings. Density basically means more individual residents on shorter term leases. This provides you with more flexibility to adjust to ever changing markets. On the flip side, you can require longer term leases - in a market that is having a downturn, as this can help to minimize your loses.
There is an easy way to calculate the value of your investment. Take the net operating income from your investment property and subtract your operating expenses. This will give you what is called the Net Operating Income. From Net Operating Income, you subtract our mortgage payment, and this brings you to cash flow.
Divided your net operating income (NOI) by the going capitalization rate. If you don't know what the going cap rate is, contact a real estate professional (broker - such as myself) to assist you with this. Capitalization rates are determined by evaluating recent sales statistics of similar properties in a given market area. Your broker will be a valuable tool in determining your market's capitalization rate.
If you have a property with an annual $100,000.00 NOI in a market where the capitalization rate is 6 percent, then the value of the property would be $1.66 million. Your equation would look like this:
NOI ($100,000.00 (divided by) Capitalization Rate (6%) = Asset Value ($1.66 million)
If you want to dramatically increase the value of your investment, then you do this by increasing the Net Operating Income. If you increase value, then this means, you can quickly then realize these benefits by refinancing your property and reinvesting the equity into other multifamily investments.