When investing in real estate, it is highly desirable to achieve positive cash flow on a month-to-month basis. This is true even if you are counting on property value appreciation to supply the bulk of your desired return on investment. If you are losing money month-to-month, you may find all of your eventual profits eaten up by the monthly drain on your income. This will be particularly true if there is a downturn in property values for a few years.
Worse yet, you may tire of the monthly outflow of cash, and you may give up on the property before you have a chance to achieve the desired appreciation. You will be much more comfortable waiting for your property to appreciate if you are making at least some money every month, or at least not losing money every month.
One exception to this rule is when you are purchasing a property to fix it up and flip it. While you are fixing it up, you may not be able to rent it out at all (depending on how extensive the work is) or you may have to rent it at reduced rates. The negative cash flow is just part of the expense of rehabilitating the property and will be quickly reversed by your profits upon sale of the property. This assumes that you have properly calculated all of your costs and you have purchased the right property.
In other cases, we think it is wise to achieve positive cash flow, Here are some tricks and ideas involving the financing of the property:
Lower cost properties are generally easier to rent at a profit than higher cost properties. It therefore makes sense to purchase two or three smaller homes than one larger one, if your intention is to rent them out.
If you don't already own your own home, consider living in the first "investment" property you purchase. (This assumes it is convenient to live in the area where you want to invest.) Interest rates and down payments are lower for a primary residence. Also, you don't have to deal with the problems of finding and managing tenants, paying for any damage they may cause, and absorbing the cost of an occasional vacancy. This will also give you very valuable experience in dealing with real estate.
If you live in a home for only two out of five years, it probably qualifies as a primary residence from the point of view of the IRS, and therefore appreciation of the property value is probably tax free up to a certain level (for federal income tax). Check with your tax advisor for the exact rules. So one strategy is to purchase a new investment property every couple of years, live in it for the first couple of years, then purchase and move into another property. Rent out the first one while it continues to appreciate. Since you live in each new house for the first few years, you can get a loan at primary residence rates, and you will also have the tax benefits of a primary residence, yet actually own several homes at the same time.
A "second home" (that is, a vacation home) also qualifies for preferential interest rates. You have to be able to state that you live there a portion of each year and you cannot claim rental of the property as income. There are other requirements such as location of the property. If this fits, consider making one of your investment properties a second home. Do check with your lender to be sure you know all the requirements for a home to be considered a second home before you go out and buy one. Note that with a second home, you cannot use any rents your charge as income. You will have to qualify for the loan based upon your income without considering any rental income from the second home.
The easiest and best way to achieve positive cash flow is to get a loan with a ridiculously low interest rate for the first several years. Nowadays, a number of lenders offer "payment option