The first step of determining and managing cash flow comes with the RV Ratio. While there are a lot of other elements, the RV Ratio can get the average investor started. Here's a little more information about managing cash flow with the RV Ratio.
Divorce and Income Property
of wealth not often mentioned is divorce. Many people claim the reason it destroys wealth is because both partners own half of the investment. However, the real reason usually has to do with liquidating assets at the wrong times. For this reason, it may actually be a good idea to time divorces. It's important to only get a divorce during peaks of the market. While the market is down, do whatever you can to avoid divorce. Once
the market is on the upswing, it's okay to divorce if absolutely necessary.
Managing Cash Flow
Managing cash flow is a key element of income property investment. Many people, when talking about income properties, often focus on positive cash flow. They'll claim they own multiple properties, all with positive cash flow. But honestly, it's not good enough. For instance, if there's $
2 million invested in those properties, free and clear of debt, it's important to consider
opportunity cost. Opportunity cost represents the opportunities an investor could have received by taking another route. Essentially, it's difficult to determine if the financing is there because the investor's money is too invested in the property.
The RV Ratio
There's an easy rule of thumb which can simplify the issue, and Jason Hartman calls it the RV Ratio. Essentially, this ratio will simplify things with a quick evaluation. Jason calls it a “rent to current value” ratio. Here's an example of how it works: if a property is $100,000, it should produce at least $700 a month, or .7%. The minimum acceptable RV Ratio is .5%, or $500 a month for every $100,000. Anything below .5% is too low.
Cap rate can be defined as the ratio between income produced from an asset and the cost to buy the asset. Jason Hartman isn't a fan of the cap rate ratio, because it doesn't include appreciation. If the income property appreciates, the investor won't expect it with the cap rate ratio.
Ultimately, what needs to be evaluated first with every property is the RV Ratio. How much is it worth? How much does it rent for? Once you have the RV Ratio, you'll be able to evaluate the rest of the property. (Top Image: Flickr | 401(K) 2012)
The Young Wealth Team