Real-estate investors must understand how crucial it’s to project cash flow when coming up with an investment in real estate. In the end, the success or failure of a property investment does ultimately rely on the property’s ability to produce revenue.
The concept is straightforward. Rental properties are at the mercy of a movement of funds whereby money will come in and money goes out. When more money will come in from the property than goes out the result is a “positive cash flow” that benefits the investor. Likewise when more money goes out than will come in the result is a “negative cash flow” that regrettably means the investor must “feed the property” with personal cash to make up the deficiency.
This is exactly why prudent property investors make revenue projections when evaluating an income-property investment. They would like to know whether the property will produce enough cash to pay its bills over time. Even if the investor decides that the investment is worthwhile enough despite its negative flows, since they’re brought front and center throughout the evaluation, they can be anticipated and therefore are less inclined to blindside the investor later following the purchase.
In their rental property analysis, investors commonly rely upon reports such as an APOD and Proforma Income Statement for these projections. Let’s look at the strengths and weaknesses of both.
An APOD (annual property operating data) is a mini income statement that is helpful to property investors as it provides “first-glance-look” at the property’s financial condition đông tăng long. In a concise manner, it reveals the income, expenses, and cash flow. Its shortcoming lies in the fact an APOD offers only a projection of cash flow after the very first year of ownership, and it does not account for tax shelter. So look at an APOD to provide you with a “snapshot” of the property’s cash flow that will enable you to make a preliminary decision whether or not to look further into an investment opportunity, but don’t rely upon an APOD too heavily.
A proforma income statement, on one other hand, is a more robust way to project cash flows as it anticipates a property’s financial condition beyond the very first year of ownership (commonly extended out over an amount of ten years). Moreover, a proforma income statement can account for tax shelter (at least those created by the better property investment software solutions), which enables the consideration of cash after taxes and is essential to investors because they can anticipate what may or may not be left after income taxes are paid on the property’s earnings. Its shortcoming, however, not unlike any projection, is that the numbers are projections at the mercy of a lot of variables that will easily be skewed.
Here’s the bottom line.
You shouldn’t rely on either an APOD or perhaps a Proforma Income Statement to provide you with enough information to produce a sound investment; there’s a whole lot more for you really to consider. Nonetheless, for property investing purposes, these reports can provide you with cash flow projections you should consider before you buy any rental property so you don’t find yourself facing negative cash flows you didn’t anticipate–a prospect no property investor relishes.