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How is Cash Flow Important to Real-Estate Investment?
Financial Freedom are buzz words of this day and age, which refers to having more Passive Income than monthly expenses. One way to generate Passive Income is to invest in real-estate.
Real-estate investments can generate ‘rent’. When we have invested in enough real-estate to generate more rent than monthly expenses, we have financial freedom. In addition, real-estate investment helps us to secure loans, which helps to get financial freedom even faster.
For instance, if one unit at the price of 1,500,000 THB can be rented out for 10,000 THB, for someone with 20,000 THB in monthly expenses, investing in 2 units can generate 20,000 THB. The challenge is finding the 3,000,000 THB to invest in 2 units to generate 20,000 THB. Finding 3,000,000 THB to invest is not a simple task.
Investing in real-estate helps secure bank loans. If you needed to borrow 3,000,000 THB, we would need to repay the bank about 15,000 THB per month. That means if the room in which we plan to invest can generate 20,000 THB, we would have 15,000 THB to repay the bank and gain a cashflow surplus of 5,000 THB each month.
Placing a higher down payment can reduce the amount you need to borrow. For example, if you place a 20% down payment on your property, you would have to borrow only 2,400,000 THB. The lower the loan amount, the lower the monthly repayment amount. From having to pay 15,000 THB per month, you may have to repay only 12,000 THB per month. That means you would now have a surplus cashflow of 8,000 THB per month.
As you can see, you can generate 5,000-8,000 THB more in monthly income from assets without having to really spend much of your own money. If you can manage your monthly expenses, you’re getting that much closer to your Financial Freedom. The more you invest in real-estate by investing in more condo units or houses for rent, the more likely you are to achieve Financial Freedom. Apart from having more cashflow than your monthly expenses, you would also be able to secure more loans for future investments.
Nevertheless, like all investments, real-estate investment comes with ‘risks’ like ‘cash inflow’ or rent that might not be generated as expected, whether it’s because you can’t find a tenant, the tenant misses rent payment, or even if there were damages to the unit which requires maintenance and renovations that year.
On the other hand, ‘cash outflow’ like bank loan repayments can’t be missed. When rent is insufficient due to unpredictable circumstances that may cause ‘negative cash inflows’. If you are unable to generate rent for long periods of time, you may not be able to complete your loan repayments and your property may be subjected to foreclosures.
The most important factor for generating positive cashflow is to analyze the Target Group of tenants carefully. What are their needs? What kind of rooms do they like? What style do they prefer? How much is their purchasing power? What size of room do they prefer? What interior design suits their needs the most? The answers to these questions increase the chances of generating sufficient tenant interest to make a sale or sign a lease.