Cashflow is Possible!

[invst4profit]

[quote name=`RedlineBrett` date=`Jul 22 2009, 12:16 PM` post=`62432`]
Um not exactly. I have $440/mo saved up until I hit an expense. If I go twelve months then get hit with $5280 in maintenance/repairs then my cash flow would be zero. Until then I am making $440 a month. Will have some good years and some bad years when big ticket items need addressing.... but as you and I have demonstrated before we differ in that I factor in principle paydown and capital appreciation for the larger expense items while you force your investments to deal with all expenses out of cash flow only.



Based on your experience what would you estimate your average monthly expenses to be on a property such as this. For the sake of novice investors what would you actually expect monthly cash flow to average out to be while holding this property.

Aside from the taxes and maintenance repairs as you have mentioned do you include all other expenses associated with a property when referencing cash flown. Property management, Legal, accounting, evictions, vacancies, advertising, utilities when vacant, etc. etc.

I am very interested in understanding how cash flow, as an example, is defined by individuals specializing in different aspects of investing.
I believe for novice investors it is imperative they understand the perspective of the individual providing answers otherwise there learning curve could flat line.
You and I are perfect examples of the importance of understanding this distinction when we both answer the same question and our answers are 180* appart.

 

[Mitch Collins]

Hi again;

Greg - here`s another example of a great cash flow property.

I have a 4 plex that we purchased about 3 years ago for $340,000, and sunk $30,000 into renovations. We got an interest only mortgage with Merix at Prime -0.9% with a 75% LTV.

Our current mortgage payments are under $400 per month, and tenants pay all utilities.

The rental income on this property is $4,150 per month, and it has consistently cash flowed over $2,800 per month for my partner and I each month for approximately 38 months. This is net of all operating expenses. Because I manage well, we`ve never had a vacancy in the unit, never had to pay for evictions, etc.

So, this is real cash flow. Why speculate on what evictions will cost when analyzing a property? Evictions are largely due to poor management in my experience. Accounting on a month to month basis was done by me, and I paid for the real accountant bill out of my pocket at the end of the year. I don`t call that a property expense.

We keep a $5,000 reserve fund for each property we own, and when a big ticket item goes (furnace, hwt, etc) we pay for it and then repay the reserve fund out of the cash flow over a few months so there isn`t a cash call on partners and it helps to normalize the rental income.

My point is this - even though I factor in vacancy rates, R+M, PM costs and payment on PLCs for DP into my property projections, I know those costs are fabricated to a large extent and that my actual month to month cash flow will be higher than estimated. When you are just starting out or looking for JV partners, you NEED to understand these costs are real, but you also need to understand that if you play your cards right you will rarely ever have to pay for these in reality.

Greg - can you show us a property that you would buy and all the numbers on it? And then show us how you analyze the potential expenses and how you plan to normalize cash flow, etc. Maybe

This would be great for all new investors here to look at how several people approach their business, and pull what`s helpful from each of us into their own business.

Good thread - really shows the differences people have towards investment philosophies!

 

[invst4profit]

Mitch:

Under my investment philosophy I am not able to give specific examples. I can say that I target properties assuming total expenses will be 50% with a minimum positive cash flow of $100 per month but that is the most I can say. In all honesty I will admit my results do exceed that target. Possibly due to the fact that I manage and do repair/maintenance myself. I do pay myself for this work as an expense.
To post a specific example would be to take a "snap shot in time" that would not accurately reflect true cash flow over the life of a property.
I operate under the principal that one property, various properties or multiple properties over a long term, 10-20 -30 yrs, will experience overall expenses in that 50% range.
Examples of cash flow on a property can not include unexpected expenses that have not happened yet. For this reason your snap shot, as an example, means nothing as you yourself pointed out by siting the case of furnace replacement. To build up your reserve or re build reduces your overall cash flow so you already know your example is inaccurate.
A 38 month time frame to me is too short of a time period to be accurate using my investment philosophy especially when my accounting includes everything from taxes to stamps to my management fees in calculating expenses on any given property.
Also I do speculate on the unknown such as evictions. They happen and in Ontario one eviction could cost $20,000 (or more) when you factor in lost income and property damage repairs. One such case in the life property completely changes your numbers.

I have stayed true to this philosophy and have ploded ahead at a comfortable pace. I have never desired to be rich just comfortable and to that end have been very successful.

I can show my latest purchase but , again, the numbers are incomplete so only give a idea of cash flow not actual cash flow.

Purchase price $ 410,000 (includes all purchase fees, legal, etc)
Mortgage P&I (VTB and HELOC) $2200/month (100% financed)
Taxes $4100/yr
Insurance $1140/yr
Utilities $1700/yr
Septic $1100/yr
Water $1000/yr
Grass/snow $3400/yr
Misc expenses/repairs etc. UNKNOWN

Income at purchase $5300/ month (now $5800/month)

Whether this is a good or bad investment depends on the unknown expenses but I will admit I did not adhere to my own 50%, $100/ door, rule on this purchase.

 

[ChantalDube-Menard]

QUOTE (rabrol @ Jul 15 2009, 11:41 AM) OK, so back to the original question then with a bit more information.

Are you guys finding deals that cashflow when :

1) R&M are included
2) Property tax included
3) Insurance included
4) Vacancy rate at 5% included
5) Property management is factored in (are most people paying 8-12% of monthly rent for pm?)
6) Interest rates are sitting at 7 or 8% in 5 years (thanks for the link Thomas)

Basically if there aren`t such deals out there, getting into Real Estate would seem fairly risky to me as a newbie considering making a career out of it.

Secondly, are there certain property types that lend themselves more to cashflowing with these criteria within the Edmonton area, or do I need to be looking further afield? Surely if wade can cashflow a minimum of $300pm with 20% down in the Calgary region, it has to be possible.....

Give me some good news folks! Some real world examples!

Hi Robin,

Chantal here from Fort McMurray... if you do some research, due diligence and set up your property well, you`ll find rediculous cashflow in Fort McMurray. I honestly beleive Fort McMurray is THE city that offers the best cashflow not only in Alberta but in Canada. You do need deeper pockets to get into the market there`s no doubt (i.e.: $320K - $450K for a decent 3 bed, 1.5 bath single family home), and I`m not going to sugar-coat it... vacancy rates have gone up because of the economic situation and some of the oilsands projects being shelved. Having said that, there is still awesome opportunities IF you stand out from the crowd and market yourself well. Here are some actual figures for you.

We own 3 condo townhouses up here (3 bed, 1.5 bath). Our lowest rent is $4100/month and our highest is $4800/month. We provide quality fully-furnished suites and pay all the utilitites to make it hassle-free for the COMPANIES we rent to. We only do 12 month leases which makes life easier for us and cheques from permanent reputable companies never bounce which is great!

Specific Figures:

Purchase Price: $367,900
Rent (let`s use $3500/mos which is $600 lower than our lowest rent as an example): $3500/month
condo fees: $318
taxes: $119
insurance $30
Property mgt (we do our own but we factor 10% anyway in our cashflow) $410
Vacancy (5%) $205
Repairs & Mtce (3%) $123
Utilities (averaged throughout the year: gas, elec, phone, internet, cable, water/sewer) $403
Mortgage payment (P&I) $988

So... total monthly expenses = $2596
With gross rent of $3500, you`re still cashflowing $904 per month on ONE single family unit using conservative rent figures and actual numbers for monthly expenses.

If you want data to support the economic fundamentals of the Fort McMurray region, I`d be happy to share that with you. Send me an email: [email protected]

Lots of people are afraid of Fort McMurray but once you dig deep and look at the fundamentals, the population projections for 2020, the infrastructure improvements taking place to accomodate the growth, it really is a no-brainer. Hope you find that helpful.

Thanks,
Chantal Dubé-Menard

 

[bizaro86]

What interest rate/amortization/downpayment are you using in this example?

QUOTE (ChantalDube-Menard @ Jul 23 2009, 09:48 AM) Specific Figures:

Purchase Price: $367,900
Rent (let`s use $3500/mos which is $600 lower than our lowest rent as an example): $3500/month
condo fees: $318
taxes: $119
insurance $30
Property mgt (we do our own but we factor 10% anyway in our cashflow) $410
Vacancy (5%) $205
Repairs & Mtce (3%) $123
Utilities (averaged throughout the year: gas, elec, phone, internet, cable, water/sewer) $403
Mortgage payment (P&I) $988

 

[invst4profit]

My calculator shows a $367,900 mortgage would need to be 35 yr amt @ 0.702% for monthly payments of $988.
With a 5% mortgage you would have to pony up $170,900 in cash to have payments as low as $988/ month.
That seems like a lot of money not earning it`s keep in order to "assist" cash flow.

I also wonder what the numbers are on this example.

 

[housedoc]

QUOTE (invst4profit @ Jul 23 2009, 08:01 AM) Purchase price $ 410,000 (includes all purchase fees, legal, etc)
Mortgage P&I (VTB and HELOC) $2200/month (100% financed)
Taxes $4100/yr
Insurance $1140/yr
Utilities $1700/yr
Septic $1100/yr
Water $1000/yr
Grass/snow $3400/yr
Misc expenses/repairs etc. UNKNOWN

Income at purchase $5300/ month (now $5800/month)

Great numbers!
What type of property is this? Is it your mobile/modular/trailer park?
Just curious.

 

[invst4profit]

Yes. 33 unit permanent community on 31 acres purchased April 08.
I paid more than I wanted but the up side was a 75% VTB and the fact that lot rents were below market.
So far so good. Interest rates have been kind to me and monthly income is rising about $300 each year.
I am now in negotiation to purchase two homes in the community. One I`ll rent out the other I will flip if things work out.
The real real money in these deals is immediately bringing the rents up to market. That is another $100/ month each.
Small potatoes for most investors but more than enough for me.

 

[EdRenkema]

QUOTE (invst4profit @ Jul 25 2009, 09:14 AM) Yes. 33 unit permanent community
That is another $100/ month each.
Small potatoes for most investors but more than enough for me.

An assumption?
By my calculations that is $3,300 per month more on a property already `cashflowing` well.
That increase alone is enough for me to live on.

 

[invst4profit]

Unfortunately in order to raise the rents to market the ownership on the homes have to change hands. Even when they do I am restricted by the RTA to raise no more than $50/ month. That is why I buy the ones with the lowest rents when they go up for sale. That way I can resell at market rate after a little rehab to raise the value.
Ideally I would have wanted to purchase this property with a positive cash flow of $3300/ month but due to my financing and the below market rents I am only seeing about $2300/ month at this time. Should be close to $4000 maybe higher within 3-5 years.
Of course there is also the principal pay down but I don`t count that till I sell.
This little park is my freedom 55 plan.

Ed there is gold in renting dirt and tenant problems are almost non existent. The real advantage to only renting the dirt is that expenses, on the right park, are usually only in the 30% range.

 

[rabrol]

QUOTE (invst4profit @ Jul 25 2009, 03:40 PM) This little park is my freedom 55 plan.

Ed there is gold in renting dirt and tenant problems are almost non existent. The real advantage to only renting the dirt is that expenses, on the right park, are usually only in the 30% range.

Good on ya! You`ve got a good deal there with a way to maximize the cashflow over time, with no need for some of the extras that go along with tenants. I like the idea

Are there any other kinds of "dirt" you specialize in besides trailer parks? What other good cashflowing opportunities are there for land?

Rob

 

[housedoc]

QUOTE (invst4profit @ Jul 25 2009, 02:40 PM) This little park is my freedom 55 plan.

.


You`re still working?!!!!!
Awesome property! Correct me if I`m wrong but the previous owner would have to be receiving roughly 1/4 from you monthly (VTB) than the monthly +`ve cash flow at closing?
Would you be paying interest only on the HELOC and a premium on the VTB?
What about tornado insurance?
I liked the evil clown too.

 

[invst4profit]

rabrol

The park is my only dirt investment at this time. I may consider buying another one in the future but for now I do not see a need to expand my investments.

housedoc

Yes still working but retiring in Dec at 56yrs.
I have no tornado insurance but should maybe consider as they do seem to be tornado magnets.
HELOC is strictly interest and hopefully will stay that way. The VTB is at 7.25% (7 years). Not too bad considering it would have cost the same at the bank but I would have had to put up a larger down payment.

 

[Mitch Collins]

QUOTE (invst4profit @ Jul 25 2009, 02:40 PM) Unfortunately in order to raise the rents to market the ownership on the homes have to change hands. Even when they do I am restricted by the RTA to raise no more than $50/ month. That is why I buy the ones with the lowest rents when they go up for sale. That way I can resell at market rate after a little rehab to raise the value.
Ideally I would have wanted to purchase this property with a positive cash flow of $3300/ month but due to my financing and the below market rents I am only seeing about $2300/ month at this time. Should be close to $4000 maybe higher within 3-5 years.
Of course there is also the principal pay down but I don`t count that till I sell.
This little park is my freedom 55 plan.

Ed there is gold in renting dirt and tenant problems are almost non existent. The real advantage to only renting the dirt is that expenses, on the right park, are usually only in the 30% range.


That`s a great cash flow Greg - but you have 33 units to manage there...

When that`s taken into consideration are you still making good money per hour? What dollar amount do you give your time?
That`s 33 rents to collect, 33 tenant files to keep, 33 everything. Are you JV`ed with anyone? And if you were and you were self managing, that`s a lot of work for 50% of the cash flow.


I just wanted newbies to realize all sides of the equation

Thanks for the example Greg - I should start looking at parks too..interesting!

 

[invst4profit]

Newbies do need to be aware of all sides.

If they want to operate as I do being my own PM there are trade offs.
I have on more than one occasion spent several hours snaking my underground sewer lines under a home in the middle of the night in the dead of winter. I have spent many other hours in cold blowing rain wrestling with branches and trees down.
I do have some tenant issues but these consist of getting them to maintain the exterior of there homes and lot to my standards. Fortunately as home owners in a community they generally take pride in there homes appearance.
I also have some problem tenants that I wish I did not have to deal with but that is part of the business.
As a park owner my major responsibilities are infrastructure - roads, sewer and water.
On average I spend about 4 hrs per week at the park with a long list of "ongoing projects".
I concentrate my efforts on preventative maintenance which is important in eliminating those dead of winter late night calls.
Because I work full time I chose to spend one evening per week at the park, plus emergency calls rather than give up my weekends.
It isn`t always easy and I have spent some vacation time in the summer at the park. Winters are slow, summers busy.
I manage because I want to and enjoy doing so. I am not using time and efforts that would otherwise be spent on finding more deals.

I do not have a partner except my wife, we spend about 4 hrs per month on accounting and book keeping stuff and as I said about 4 hrs per week on Managing the property.

 

[benho2006]

This is a great topic. It`s kind of disappointing that there aren`t that many examples of cashflow for Toronto. Are there any other gurus out there in Toronto that have achieved cashflowing investment properties? Please share some hope.

-ben

 

[invst4profit]

Cash flow in TO is not truly possible for the most part. Unless the owner has a great deal of equity in the property positive cash flow is hard to come by and the reality is it is not true cash flow they are experiencing. The positive return they are seeing is mostly from the cash investment not from the property itself.
Cash can be better invested without the headaches of being a LL in my opinion.

If you are in TO it is best to look beyond the horizon for investment opportunities.

 

[myme22]

QUOTE (terri @ Jul 15 2009, 01:49 PM) Greg,I calculate my cash flow based on 100% financing because I use my LOC as my downpayment so I have to pay interest on it monthly. For me I won`t buy anything that doesn`t cash flow when I factor in the interest on the downpayment. Now, I do do my own property management so that saves me a bit every month, but even still if (or more accurately when) I have a property manager one day, I`d still cash flow @ 100% financing.I agree with you that it seems odd that some people choose to base their cash flow estimation on 25% down or 30% down. Anything will cash flow with enough d.p. I guess they are looking at ROI and in the end for most people as long as it does cash flow or at least break even, if you are not holding forever then it`s about ROI. Right now I need cash flow as I don`t have another source of income.

Terri

Hi Terry, Greg

I would loudly agree with your point of view!
Even if you can afford to get 0% return on your dp, how can you sell that to jv ptnrs??

When I calculate (initially), I always use 100% financing @ 5% (this is to already blend in a rate hike) over 30 yrs, as well as a 40% XP ratio if they don`t give you all the XPs, as that is what you aim to achieve.
I also read someone talking about St John, NB ppties, who talks about a 50% ratio, which makes a lot of sense.
Any of you familiar with that area?

Anyways, if that doesn`t give me a minimum net $100 per door CF (after financing), I don`t look any further.

You are also right that the one percent rule makes a lot of sense, as a rough initial filter.

On a tangent, is that deep water soloing on your profile pic, Terry?

Serge

 

[kanabel]

QUOTE (ChrisDavies @ Jul 14 2009, 10:35 AM) I`ve got one right now. $170k purchase, three bedroom townhouse, rented for $1175. Cashflows great at 10-15% down.

I suppose it`s Edmonton. What area if you don`t mind? Thnks
Dejan