Cash Flow Zone

[snow2wake]

Hi Everyone,



I am a newbie to the forum. I have just completed Don's books "Real Estate Investing in Canada 2.0" and "81 Financial and Tax Tips for Canadian Real Estate Investors". I am somewhat new to real estate investing (although I do have some background in banking and own a few proeprties already but certainly am no expert) and wanted to get some clarification around the concept of the cash flow zone. I understand that it is ideal to generate as much positive cash flow as possible, but when do you determine it is enough positive cash flow to deem it appropriate to move forward with purchasing a property for investment?



As an example



Purchase Price:

$115 000



Mortgage:

$92 000/Mthly Payment $440



Other Monthly Payments:

$240/Strata Fee

$65/Tax



Rent: $800/Month



In this instance there is positive cash flow $55/Month. Is that enough cash flow to consider the property for investment or would it be worthwhile to move to the next opportunity?



Thanks in advance for your help.

 

[Thomas Beyer]

There is no right or wrong answer here. It depends on your financial situation (i.e. other income) and state of repairs ie age of asset, as a cash-call of $12,000 for a new roof may be coming or a prolonged vacancy for 3 month.



I'd say it is a little skinny not knowing much about the location or property.

 

[invst4profit]

If that is a real example I would consider that property to likely have negative cash flow. There are many items excluded from the expense numbers. I believe a $55 cash flow would be too thin to cover the inevitable condo fee hike and at less than a 3% return on investment not good enough for me.

The most important thing is to make sure you know and fully understand what "expenses" encompasses. It is impossible to calculate ball park cash flow without knowing/including all expenses.

 

[snow2wake]

Thank you to both above posters for your responses, greatly
appreciated. I get the point that Thomas Beyer is trying to make; mainly
that the answer is somewhat subjective given your personal financial
situation. Also Greg thanks for your input regarding expenses, that is something I will definitely be aware of when faced with opportunities in the future.



That said is there a rule of thumb that you more experienced investors rely on when doing property analysis? ie. is there a certain hurdle rate that you must achieve on your own money before entering into a deal?



The example above was a real example. I am based in Surrey, BC and that is where the data came from. I am finding it challenging to find properties in the cash flow zone in this neck of the woods. Any advice for a newbie on other areas of the country to explore? Maybe I just need to dig harder?



Thanks

 

[Rickson9]

The answer depends on the investor.



Speaking for myself, at a purchase price of $115k I would need annual gross rents of at least $23k a year or just short of $2k per month.



Everybody is different.

 

[acurAspec]

@Rickson9



What kind of property is this that you speak of? You must have a working example in your repertoire... I find it impossible to find a property for 115k to rent out for so much. It must be a pretty worn out property that requires many upgrades and fixes?



Sasha

 

[Karma]

Yeah . . . wouldn't this cash flow at half of those numbers, i.e. 11500 p.a. which is roughly 1000/month? I don't believe any properties exist that you can purchase for 115 000 and then rent out for 2000/month, it's absurd! If they do exist show me where and I'm in!



S.G.

 

[Rickson9]

http://www.financialwebring.org/forum/viewtopic.php?f=34&t=113827





http://myreinspace.com/Real_Estate_Discussion/62-17378-107437-Canadians_Snap_Up_US_Properties.html





It's all good.

 

[margaretcowan]

I don't know how old the condo is or what condition it's in. I've seen a few condo and house listings over the years that "forget" expenses for the inevitable repairs and maintenance. Adding repair & maintenance costs in to your income and expense statement above may take you into negative cash flow territory.



Personally, I aim for a return of 5% cash on cash. For example, if my downpayment is $50,000, I want to make a cash flow of $2500/ year after I pay all expenses and mortgage payments. But that is just me---I need cash flow. Every real estate owner is different.



Margaret

Mama Margaret & Friends Cooking Adventures in Italy

www.italycookingschools.com

 

[Rickson9]

I don't know what negative cash flow looks like because I've never seen it yet. 20% gross margins gives me a lot more leeway than others who have lower standards.

 

[Thomas Beyer]

[quote user=margaretcowan]Personally, I aim for a return of 5% cash on cash.


That is prudent. Hopefully your 11 suiter has a low enough mortgage to get that !

 

[Rickson9]

I just finished my interview with Romana King of MoneySense magazine this afternoon. This was my fourth interview in a year (MoneySense x 2, Associated Press, Globe and Mail) about the U.S. RE topic. Somebody must need a lot of space to fill.

 

[snow2wake]

Margaret,



Thanks for the insight. Do you have an accountant or real estate agent that you work with here in the lower mainland that you would recommend for someone who is just getting started?





Rickson9



Thanks for the links to the interesting info and discussions

 

[invst4profit]

What I look for in considering a purchase is that a property would cash flow based on a 100% mortgage at a rate I would project for 5 years and estimating expenses in the 50% range.





Initially I would like to see $100/door/month minimum positive cash flow based on those rough requirements.

 

[Thomas Beyer]

[quote user=invst4profit]

Initially I would like to see $100/door/month minimum positive cash flow based on those rough requirements.


That is tough [but not impossible] to find.



cash-flow is just ONE of several variables. There is also mortgage paydown and equity creation through time, inflation and improvements, usually the biggest slice of the pie.



Cash-Flow and equity upside need to be considered IN PARALLEL, as often you find better cash-flow deals in city with high CAP rates due to poor economies, with little or no equity upside, whereas cities with a bright future have poor cash-flow [because they are more expensive] but more equity upside potential !

 

[housingrental]

Hi snow2wake

To directly answer your question in your second post

Aim for at minimum annual rent to be 10% of purchase price - or the potential to get there based on current market rents once X upgrades are done, etc..