Float

Definition of "Float"

Written by

Vanessa Brown

August Gray Realty Group

The float has several meanings in the financial world and the real estate terminology. Typically, the float refers to the number of funds, represented by checks, that an institution or an individual issued and another agent hasn’t collected or received yet. In financial terms, it could determine the period between a check deposit at a bank and the actual payment. 

Banking institutions and float, i.e., double-counted money

Banks deal with float, more precisely with a certain amount of money they calculate twice because there is a time gap in recording down payments (securities) or money withdrawals. Banks tend to process paper checks with an inevitable delay. 

Once a client deposits a check, the institution accredits the receiving customer’s account. Still, there’s a delay in receiving a payment from the payer’s bank and its consequent registration. Until they finalize the amount’s registration, the same money is present in two separate places. 

In other words, the sum exists in both the payer’s and the payee’s or beneficiary’s accounts. Generally, this double-counting lasts two days at most until the check clears. The delay usually happens if someone deposits the payment at another bank. It has to go through the Federal Reserve. Only after that does the money arrive at the payee’s bank. 

Positive vs. negative float

In the meantime, the money can still appear in the payer’s and the payee’s accounts. This double-existence is what we call a positive float in the banking system. However, the float is negative if the check arrives at its destination bank one day. Thus, the amount has been withdrawn from the payer’s account but not accredited to the beneficiary’s account. Nowadays, the float problem is less significant than in the past because electronic payments more or less eliminated the physical transportation of checks. Using float can be advantageous for both individuals and companies. They can gain time and acquire interest before their down payment clears the bank.

Float depends on the billing cycles.

The float defines using someone else’s money for free. A typical example of this is credit cards. Most credit cards have a billing cycle of about four weeks to a month. The process covers the period between two consecutive payments for a specific service giving a guideline to companies when the next billing session is due. 

The statement for expenses acquired during that billing cycle goes out after the end of the billing cycle, usually at the beginning of the following month. The payment due on that statement is about three weeks later. Now comes the gist, and where float comes into the picture. We advise you make a huge purchase at the beginning of the billing cycle because you’ll have almost seven weeks until the end of the following month to make payment. However, you’ll lose an entire month of float if you purchase at the end of the first month.

Make your regular monthly payment deposits so that you can use your credit card’s money for free at the beginning of the billing cycle. This scenario applies if you don’t have a balance. Under such circumstances, float defines the ability to use the funds on your credit card free of charge during the first month. 

You can now calculate your flow as follows. 

Float = your available balance – your book balance.

The float and desire method in real estate

Local real estate agents can help you assess a rental property to buy using the so-called float and desire method. Banking institutions and appraisers often refer to it as the debt capacity method. It calculates property worth based on revenue, costs, and financing. Let’s see the essential steps in calculating the float and desire analysis.

The mortgage lender will pose demands for sure (commonly known as lender’s demands.) The pricier the property, the higher your loan will get. To put it simply, you have to multiply the loan to value ratio and the loan factor. Secondly, we have to inspect the buyer’s demand. A buyer is interested in down payment and cash-on-cash return. A successful real estate transaction satisfies both the buyer and mortgage lender. In the third step, we add the lender’s and buyer’s demands. The result represents the capital rate. Property for sale must produce a significant capital rate to please all parties involved. 

Finally, but most importantly, we arrive at the net operating income (NOI). You get the optimal buying price of a rental property by dividing the NOI by the capital rate.

What does floating real estate mean?

Floating homes are alternative housing options. A shortage in houses triggered their widespread. Imagine a residence on the water without an engine or navigation system! You can live on a floating home usually docked next to similar houses. Note, however, that they’re not mobile homes, unlike houseboats. Still, they’re linked to various public utilities, such as electrical and sewer lines. Instead of a traditional mortgage, you’ll have to apply for a floating house loan if you wish to purchase one.