When you enter a commercial real estate deal, you want a forecast of its income and expenses. Having clarity on these key financial concepts will help you clearly understand what is cash flow in commercial real estate.
What is Cash Flow
Cash flow is your net income or profit. This is your income after you’ve paid all operating expenses, subtracted debt service (if any), and set an amount for future repairs on your property.
Ideally, you’d want your commercial real estate property to have a positive cash flow so that investing in it is worth the risk.
Here are the benefits of having an investment property with positive cash flow:
- Having a passive or alternative stream of income. You don’t have to trade your time to earn positive cash flow unlike in your 9-5 day job.
- Grow your portfolio through reinvesting. You’d earn more disposable income that you can reinvest into other properties.
- Build generational wealth. As you grow your net income year after year, you’re able to build wealth that you can pass on to your children.
- Creates financial freedom. You have the financial capacity to do whatever you want when you want it, like taking vacations as much as you want. This way, you’re living the life you want to lead without stretching yourself too thin.
Factors that negatively affect your cash flow
Running a business always involves risks, even so, if you’re running a business rental. Here are crucial factors that will hurt your cash flow:
- Maintenance and building repairs
- Taxes and insurance
What can help increase your cash flow
- Increasing rent by adding value-add services
- Having long term tenants
- Performing preventative maintenance
Investing in commercial real estate requires that you understand the numbers. This way, you’d be able to predict if getting into a deal would yield the results you’d want to achieve. When a commercial investment property is likely to have a positive cash flow, it’s an indicator that this deal would be successful.
You need a trusted partner who can help you evaluate deals so you can make the best and well-informed decision. It’s crucial that you choose the right partners who can answer all your big questions so you can make that big decision on buying a commercial property.