Diamonds in the rough: spotting cash-flowing properties

Now that you've got a start on how to find economically strong areas to invest in (see last issue's "Your road map to property riches"), it's time to get a handle on how to spot properties that will generate cash flow. Shane Buckingham talks to REIN President Don Campbell to uncover some insider tips on how to get a leg up on the competition

Cash flow is the bedrock of any successful investment strategy. Sure there are those who can do well at flipping houses and profiting from price appreciation during a boom, but in an economically challenging time, especially if you're just starting out, a cash-flow strategy is your safest bet.

Cash flow simply refers to the rent you take in that exceeds the costs of operating and owning a property. So it's not hard to see why cash-flow investing can be equated more accurately to running a business rather than speculative buying.

Real estate investing is a business

Many people who hear the phrase "real estate investing" instantly associate it with "passive types of investing," such as buying stocks or bonds. But that's simply a misunderstanding, says Real Estate Investment Network President Don Campbell.

"When you are buying investment properties, in essence, every condo, every townhouse you buy is, in and of itself, a small business because it has revenue and expenses, both of which you can affect as the landlord," he says. "So it's not a passive investment at all."

When you buy stock or bonds, by contrast, there's nothing you can do to increase the income you receive from them. You're beholden to the companies you've invested in and the success or failure of your investments depends on their companies' business strategies.

"But with your property you can work on both sides of the equation. It's just like running a business," Campbell says. "You have to market your properties to attract customers, who are obviously your renters. And you have to buy and renovate products that fit your customer base."

If new investors start with this mentality, they'll be more prepared to find and analyze potential income properties that will support their overall business plan. (We'll take a closer look at marketing your property investment business later in our Investment 101 series.)

Continue learning the secrets to sophisticated property selection by downloading a copy of our December 2010 issue.

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