Cash on cash vs cashflow positive

[Thomas Beyer]

[quote user=REQRentals]

Cash flow is not the only thing but it is a big thing.
Cash-Flow is only one variable.

Real estate is a three course meal.

Two others are mortgage paydown and equity upside (or downside perhaps if overdistributing REIT or downturn in market).

Cash-flow is highly dependent on leverage, i.e. a cash only condo flows far more cash on a monthly basis than a 90% levered condo. So, what is better ? cash-flow or a higher total ROI over a 5 or 10 year hold period ? More here on this topic here: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

 

[Matt Crowley]

[quote user=REQRentals]At the other end of the cycle in the States (or anywhere else) it pays very well to rental property. If you cannot depend on the back end you need to get paid as you go along



That's a pretty keen observation and no doubt a major reason that you have chosen to invest in Florida. This is no doubt a major reason that a lot of capital has invested in US real estate.



If I were centered in Toronto I would definitely be looking to other locations to invest. NOI yield compression has been a general trend in the Canadian real estate market since 2003 (Source: http://c.ymcdn.com/sites/www.realpac.ca/resource/resmgr/events-2014-investment-forum/ipd_canada_forum_2014_final.pdf, slide 14).



[quote user=REQRentals]

The idea is not to knock to real estate as an investment but rather an observation on the cycle and its effect on investor mentality towards cash flow


Cash is still king. No argument from me there. I got on a bit of a theoretical tangent there.



I think one thing we are likely to agree on is that we can create an information advantage when it comes to our investing.



Recent legal secondary suite completed:



Purchased: $350,000

Renovations: $25,000

Total: $375,000

Gross monthly rent (before utilities, after rebates): 1,500 + 1,350 = 2,850

Gross annual rent: $34,200

Less: 27% operating expenses = $24,966

Cap rate = 24,966/375,000 = 6.7%



By knowing how to buy, where to renovate, and how to rent we can beat the "average" market performance. Over time, it gets easier.



But, if you really only have the desire to do one or two properties...you may actually earn more money by investing your capital into a REIT or in private equity and focusing on your job to invest more capital.

 

[REQRentals]

The 3 course meal analogy is a great one to explain where you make money from real estate investing. It had caught my attention before a number of times in these posts.



Cash flow, principal pay down and equity gains do not seem equal however as the last two depend on the first:



The only way to pay down principal on a mortgage is from cash flow.



The leveraged gains on equity are also dependent on cash flow to support the debt service cost.



Sweetzone has me spot-on. Here in Toronto values are sky high but cash flow will not support high leverage. It is difficult to take out equity to buy more real estate unless the property you buy will more than carry on 100%.



One angle is to borrow at 3 and lend on 2nd mortgages or do RTO and other deals.



Another is to borrow at 3% here and deploy it in a market where you can earn a higher rate on equity.



Consider the older single family home we just put under contract on good lot for future development:



Total cost including reno: $ 93,500 USD

Rent $ 1000

Net annual after expenses $ 7300 (spreadsheet)



It costs less than $3,500 to borrow the money here (which we pay in priority to any management fees or profit sharing).



In which case you have a whole second meal of cash flow, pay-down and equity with no cash out of pocket.



Almost a free lunch.

 

[Thomas Beyer]

Not every meal is a well balanced meal - indeed ! Sometimes a change of diet is recommended.

 

[Matt Crowley]

[quote user=REQRentals]

Almost a free lunch.


Haha! That's awesome



...I like how you analyzed the problem (cash flow vs. capital growth) and really dug deep to identify long-term risks of this trend (leverage eating up cash flow requiring deeper and deeper pockets in less affordable markets).



Your environment does not have to dictate how you invest in real estate at all. Well done!

 

[REQRentals]

Thanks Sweetzone,



Appreciate both the compliment and the opportunity to canvass these ideas.

 

[Thomas Beyer]

Cash is King - Cash-Flow is Queen (TM) !