Managing Your Real Estate Investment Cash Flow

by : Melanie Speed

If you've got ahead enough to invest in real estate, congratulations! You're on your way to a steady income stream that can set you on the path of independent living! However, if you're new to the world of real estate investment, the idea that you are getting anywhere from several hundred to several thousand dollars a month can shadow the realities of your budgeting situation.

First of all, if you have an investment property, chances are you have a mortgage. In fact, you probably have two - the one from your primary residence and now the one from your secondary residence. This means that, every month, thousands of dollars are needed to maintain your good standing with the bank.

Second, all properties need regular maintenance. If you don't mind doing this, it will cost you only time and the outlay of funds for equipment/materials. If you don't have the desire and knowledge to maintain and repair your property, you will have to pay another person or company to do it, which brings with it the attendant cost for their time and expertise. Lastly, major repairs, such as roof replacement, to the home can cost thousands of dollars. You need to prepare for the unexpected.

For people who can rent out their properties for more than the mortgage, taxes, insurance and attendant costs, this issue is covered - if they can keep a good renter in the property most of the time. Good renters require time invested in interviewing people and checking references. It is worth your while to rent to people who you feel comfortable talking to and dealing with.

Do a walk through with the renters and have a document for them and you to sign that notes issues (or lack thereof) with the property. Don't forget that when your renters leave, if they have been maintaining the property and cleaned it before leaving, you owe them their damage deposit back! Make sure that you do a walk through and that there is no damage. Wear and tear is one thing, but holes in the walls and broken windows are another!

You should be scrupulous in maintaining your rental properties, which also provides you with the opportunity to question your renters about any problems that they might have with the property. A good rapport with your renters can mean catching a problem before it becomes a major issue instead of paying through the nose for something that wasn't discovered until it requires a large amount of cash and time to fix.

So, how much should you allot to your investment property fund? A rough rule is 10% of your rental income should go into the fund earmarked for repair/replacement. If you have bought a property in reasonably good condition, you will likely have a "grace period" of a few years. This will give you the opportunity to save thousands of dollars towards maintenance.

Another oft-unexpected cost is carrying the mortgage during those times when you don't have a renter in your investment property. You should save enough to carry your investment rental through 3 months of mortgage payments. Another 10% of the rental income is a good amount to set aside.

It makes more sense to save a few hundred dollars more every year and carry some of your additional mortgage by yourself, then to skimp on savings and not have enough money when you need it.

Most of the time, an investment property will help you build equity while using rent to pay for the mortgage. It is an excellent way of diversifying your portfolio and amassing more income over the long term. By managing your rental income sensibly, you are on your way to independent income and ultimately, financial success.