There are many key performance indicators that investors use when determining if a property is worth buying or not. However, when running an analysis on any investment property, my standard measurables are Cash Flow and After Annual Tax Yield (a KPI that considers appreciation). I’ll focus in on Cash Flow as it is the primary metric used by most investors in residential real estate.
Cash Flow, measured on a monthly and annual basis, is a property’s income minus it’s expenses. Obviously, an investor would want a property’s income to outweigh the expenses, so that money can be put in the bank every month and used for future investments.
There is a sizable list that goes into property expenses; which I will cover extensively another time, but understanding and including all expenses in the initial analysis is key to calculating the correct cash flow and keeping you out of a bad deal.
In areas like Windsor, Fort Collins, Greeley, and Loveland, as well as anywhere in and around Denver, home affordability can be challenging. Therefore, rent can be equal to or lessor than that of a mortgage. So what would make it so appealing for an investor to invest in Colorado? Appreciation. Colorado has been on a strong trajectory with home appreciation and when homeowners and/or investors sell their properties they walk away with a generous profit.
Appreciation is just the “icing on the cake”. If your are losing money on your investment every month with a negative cash flow, then your investment isn’t a good one. Therefore, cash flow should be considered over appreciation.
To learn more about Cash Flow and setting expectations for your financial portfolio, please message or contact me at 970.775.4030 or firstname.lastname@example.org.