The Real Impact of Monthly Cash Flow !

I make a big deal out of increasing your monthly cash flow, and so should you. It's important to understand the real implications of this because they are huge. Many landlords think the extra $100 per month they create is pretty cool, but do they know what ELSE is pretty cool about that? Do you?

Many rental properties are valued based on their "cap rate." If you don't know what a cap rate is, for now, let's just say there’s a formula that is used to determine your rate of return. It often creates the price a property is bought and sold for. Let's say the "going rate" for properties in your city is a 10% cap rate. And let's say you just found a way to increase your monthly cash flow from $2,000 per month to $2,100 per month - an increase of $100.

What have you just done to the value of your property?

The value of any given property can be derived by taking the annual net operating income and dividing it by the cap rate. Your net operating income is your total monthly income minus your monthly expenses, and in this instance you do not count your mortgage payment as an expense. Look at this example:

Your annual net operating income USED to be $24,000 because your monthly cash flow used to be $2,000. So your value USED to be:
$24,000 divided by 10% = $240,000

Now that you increased your monthly cash flow by a mere $100, your value is NOW:
$25,200 divided by 10% = $252,000

You've just increased the value of your property by $12,000! That's $12,000 of equity that you could pull out with a re-finance and use to buy another property! Or, that's an additional $12,000 of profit you will get when you sell!

Re-read this a couple of times and make sure you understand it. This is critical to your success as an investor. If you currently own rental property, rework the example using your own actual numbers. Can you think of ways to increase your monthly cash flow, even by a little bit?

You can see why increasing your monthly cash flow is a bigger deal than the extra bucks it puts into your pocket each month. This extra cash flow can be leveraged for bigger and better things. This is exactly the way that real estate investors continue to buy more properties quicker than their cash flow can save up the down payments for them. When you combine increased cash flow with increased value you create through inexpensive property improvements, and then add appreciation to that – you are creating equity and buying power out of thin air.

This is one of the quickest ways to expand your real estate portfolio!

This article has been written by Anesia Springborn, real estate investor and creator of The Landlord System. Anesia teaches her students how to leverage time and money to grown their passive income stream. She may be reached by visiting http://goaldig.infusionsoft.com/go/EVLAW/mareinet/