How much cash can YOU generate today

[nepoez]

Hi all,

I`d like to ask the more experienced investors here, if you were handed $60k cash now, today. You are only allowed to use it on real estate within the next 10 months, not part of a syndicate either, so you can use it to buy a town house, apartment, house, 3plex, etc. basically solely holding a piece of real estate. You cannot add your own cash this amount, except for closing costs and staying power fund. The 60k is only for down payment.

Based on the deals you are personally aware of right NOW, or at least quite sure you can find within a few months, how much cash flow per month are you confident that you can generate after all expenses/contingency, and based on 6% interest rate, and the location has to have potential upside, ie you expect it to go up 4%/y avg the next 10 years. You can look at any part of Canada.

Why do I ask? For me, looking in Edmonton, with 60k at 6% interest mortgage I can possibly get $100/m if I get a decent 2 suiters with 2 garages rented out separately , but probably less because in real life, the crap hits the fan more than you expect. So I`m curious, if anyone here can beat this number and if so, where are you looking? I currently hold a portfolio which is doing fine NOW, BUT will go negative at 6%. Assuming I can save $60k/y I need to take these 2 years to find truly cash flowing properties to offset these potential negative cash flowing props, before interests get up there. Then after I get some true cash flowing props they will help me be able to hold the previous properties for a few years without bleeding cash each month, then I can sell them and replace them with more cash flowing props.


Thanks again!

Nepoez

 

[RedlineBrett]

Show me what you include in expenses and I`ll take a crack at it.

 

[nepoez]

Hi Brett,

Actually I`m not trying to get validation on my analysis. I`m trying to improve my portfolio by adding better cash flowing properties to it. And I would like to see some real life analysis of good cash flowing properties that experts here like yourself can get his/her hands on if given 60k. Once I see that, I`d like to know where you are looking because I`m not seeing anything that cash flows too good at 6% interest rate with only 60k down, in Edmonton. Perhaps Edmonton isn`t the place, then where, with 60k down, 6% interest.

But just to show you what I`m seeing in edmonton if I put down 60k and interests go up to 6%, here is an analysis Show me what you include in expenses and I`ll take a crack at it.

 

[Thomas Beyer]

QUOTE (nepoez @ May 30 2009, 10:10 AM) ...

But just to show you what I`m seeing in edmonton if I put down 60k and interests go up to 6%, here is an analysis http://myasset.no-ip.org/myasset/asset/vie...121925031ae00a8 When you click the link, u can scroll down for details of expenses etc. ..
I like the analysis .. it shows very well it is VERY HARD to cash-flow being 80% levered .. not impossible .. but hard ..

of course, right now inteerst rates are not 6% but sub 4% so some slight cash-flow is achievable.

Or goal in apartment buildings is about $100/suite/month .. and that is achievable with about $15,000 to $25,000 CASH per door given a price of 60-100/door !

Thus, for single family homes, townhouses or condos, cash-flow is not the target but value appreciation over a 5-6 year period. That is where the true wealth creation effect / gain is. Cash-flow is optional and as such just there to get to the 5 year exit or re-fi point.

To get true cash-flow with 60K, there are essentially 4 options in mid-2009:
a) buy a publicly traded REIT, income trust or any other stock with dividends
b) buy into a private syndication, i.e. co-mingle your cash with others and co-own some larger cash-flowing assets with equity growth
c) be less levered than 80% or
d) buy in small towns where the price to rent ratio is better

 

[Mitch Collins]

Buy in Fort St. John, Dawson Creek BC.

I`m still buying 1/2 duplexes that cash flow very nicely - for example;

Purchase price of $230,000
Rent of $1,575
Tenants pay all utilities.

Would breakdown like this
Mortgage - $866.06 (Assuming 4.5% interest rate which you can lock in for 5 years easily now, 35 year am, 20% down)
Insurance - $100
Taxes - $160
Mgmt - $100
Repairs - $100
Vacancy - $100

Total expenses of $1,426.06

Cash flow of $148.94 per month

TYPICAL cash flow of $298.94 because most months you will not actually have vacancy, and will also typically only be paying 50% of that alloted repair expense.

This is with only $46,000 down - plus closing costs, etc. Definately doable with $60k -

And here is the best part - NO ILLEGAL BASEMENT SUITES REQUIRED, NO FALSE EXPENSE ratios like I`ve seen in a lot of people`s JV presentations.

And did I mention that Fort St. John has only seen prices drop approx 3-5% during the entire time we`ve been in this recession? Compare that to Edmonton and Calgary`s 20+% price drops..

I shouldn`t be giving away my secrets here - but there you go!

Give me a call sometime at (250) 785-2007, I`ll be licenced in the next couple weeks to help people with properties just like the one I`ve outlined..I own a bunch of them in the area as well.

 

[nepoez]

It`s funny you replied. While I was struggling with my analysis last night based on member feedback of my last analysis, I went on Prestigious Properties` website to look for alternatives, still trying to weigh things out. Smaller towns was my other thought, but I`ll need to go back to square one with researches and networking again which takes lots of time and trial and error to form a trustable team.

So, still trying to figure out/decide on the best option, but the clock doesn`t stop ticking just because I do.



QUOTE (thomasbeyer2000 @ May 30 2009, 09:38 AM) I like the analysis .. it shows very well it is VERY HARD to cash-flow being 80% levered .. not impossible .. but hard ..

of course, right now inteerst rates are not 6% but sub 4% so some slight cash-flow is achievable.

Or goal in apartment buildings is about $100/suite/month .. and that is achievable with about $15,000 to $25,000 CASH per door given a price of 60-100/door !

Thus, for single family homes, townhouses or condos, cash-flow is not the target but value appreciation over a 5-6 year period. That is where the true wealth creation effect / gain is. Cash-flow is optional and as such just there to get to the 5 year exit or re-fi point.

To get true cash-flow with 60K, there are essentially 4 options in mid-2009:
a) buy a publicly traded REIT, income trust or any other stock with dividends
b) buy into a private syndication, i.e. co-mingle your cash with others and co-own some larger cash-flowing assets with equity growth
c) be less levered than 80% or
d) buy in small towns where the price to rent ratio is better

 

[nepoez]

Thanks Mitch for the help. However, that deal`s ratio can be achievable in Edmonton too with town houses that costs 170k and rents for 1200/m, but it won`t cash flow at 6% when the 5 years is up and if interest moves up by then and I cannot sell the property in 5 years. Perhaps the trick is to be sure you can sell when the term is up? But then you`d are banking on real good appreciation, a little bit on the speculative side? I could be wrong.

QUOTE (MitchCollins @ May 30 2009, 10:27 AM) Buy in Fort St. John, Dawson Creek BC.

I`m still buying 1/2 duplexes that cash flow very nicely - for example;

Purchase price of $230,000
Rent of $1,575
Tenants pay all utilities.

Would breakdown like this
Mortgage - $866.06 (Assuming 4.5% interest rate which you can lock in for 5 years easily now, 35 year am, 20% down)
Insurance - $100
Taxes - $160
Mgmt - $100
Repairs - $100
Vacancy - $100

Total expenses of $1,426.06

Cash flow of $148.94 per month

TYPICAL cash flow of $298.94 because most months you will not actually have vacancy, and will also typically only be paying 50% of that alloted repair expense.

This is with only $46,000 down - plus closing costs, etc. Definately doable with $60k -

And here is the best part - NO ILLEGAL BASEMENT SUITES REQUIRED, NO FALSE EXPENSE ratios like I`ve seen in a lot of people`s JV presentations.

And did I mention that Fort St. John has only seen prices drop approx 3-5% during the entire time we`ve been in this recession? Compare that to Edmonton and Calgary`s 20+% price drops..

I shouldn`t be giving away my secrets here - but there you go!

Give me a call sometime at (250) 785-2007, I`ll be licenced in the next couple weeks to help people with properties just like the one I`ve outlined..I own a bunch of them in the area as well.

 

[Thomas Beyer]

QUOTE (nepoez @ May 30 2009, 11:40 AM)
Thanks Mitch for the help. However, that deal's ratio can be achievable in Edmonton too with town houses that costs 170k and rents for 1200/m, but it won't cash flow at 6% when the 5 years is up ..


indeed .. but if you can't cash-flow @ 6% interest rate then you are too levered (ro pay too much) !



see post here on: "Are you too levered ?"

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10823-When_are_you_too_levered_.html

 

[ajaysritharan]

Hi;

I have been investing in small towns in Ontario where one can reasonably expect $100/door in cash flow (excluding any unexpected vacancies and/or repairs of course). The properties in these towns are older so there is a higher occurance of repairs, however.

Here is an example:

A fourplex in one of the areas would go for $140,000-$160,000. Your total cash flow on that property will be around $400/month (assuming a 10% downpayment, interest rate of 4.25% and 35 year amortization).

So the ROI, excluding closing and repair costs would be: $4800/16,000 = 30% (on paper). Property values have been increasing in the low single digits.

You did raise an valid point - that it will take time and effort to understand the area and build your team.


Ajayan Sritharan
Professional Real Estate Investor
Real Experts Inc.
www.RealExpertsInc.com
416-251-0075

 

[RedlineBrett]

Ok so I took a go at this this morning. Apologize for the delay but clients come first and it was a busy weekend.

The following analysis is for a currently listed property in Calgary. All my variables/assumptions are on the left hand side. The table shows the effect of getting the property for below list price or if you found one similar that cost a bit more.

So I am not too far from your $100/mo. I don`t agree with using 6% when you can get fixed money for five years at 3.7% but to each their own.

At current 5 year fixed rates (3.7%) this property would cash flow $588/mo if you managed it yourself, or $353/mo if you paid a management co 10% of gross rents to take care of it for you. This includes 7% vacancy. Also note I didn`t use the full 60k and have a very healthy contingency fund. I would actually trim this right down to 10% and keep the rest in my pocket for another property.

Again - my personal opinion - if you are forcing yourself to use things like 6% money, 15% vacancy, 25 year amortizations you will end up with very few properties to choose from. Mostly run down buildings in bad locations in order to make the price work. Also while the numbers might look great I think you will be much more likely to have management problems with such a building... if the only way the sellers can sell is to make the numbers dance that is a red flag in my book!

See the analysis here - http://redlinerealestate.ca/files/REIN%20case%20study.pdf

 

[invst4profit]

Brett

I am not in agreement with your example in regards to having positive cash flow. I have seen numerous examples of properties on this site which use numbers that exclude many expenses. Yours is a typical example that can be very misleading for novice investors. I believe we have had this exchange before.

My experience and that of many others is that monthly expenses will run in the 45% - 50% range consistently over the long term. I believe there was a article recently posted also stating that amount.
Many will say that they own a new or newer building that does not have repairs but this will always turn out to be false thinking if held long term as this site suggests. Actual cash flow may be ascertained at the date of sale but the buyer must estimate future cash flow.
One previous post indicated they had positive cash flow "excluding" future repairs. In this business it is not logical to look at yesterday and state a property has positive cash flow if in fact you do not plan to sell it in the immediate future.
That logic would be the same as saying I have positive cash flow some months but negative cash flow other months.

Your example has left out many expenses the "small investor` must account for.
Advertising, legal, accounting, evictions, utilities while vacant, turnaround repairs etc, and the biggest one of all major unexpected repairs. Although you have held $10,000 back for repairs you have not accounted for those expenses monthly to rebuild the fund when you do have repairs.
The way you have chosen to portray your example property is as a frozen moment in time. This may work well from a selling perspective but does not work in reality for a buyer.

Even REIN suggests that a monthly income on a property should equal 1% of the purchase price which in your example is not even close.
Plus you do not place any value on the down payment. That money will sit stagnant for as long as the property is held, in my opinion, losing money. Yes, I know your thinking ROI, but we are talking about positive cash flow.
Analyzing a property is one of those topics that few will agree on, however, my opinion on your example is that in the long term it will have negative cash flow of approximately $680/ month.
If bought and held short term cash flow may stay positive but real estate fees will more than wipe that out.

Sorry for being so long winded but cash flow estimates is one of my pet peeves.

 

[bizaro86]

As a possible answer for your specific question, you could buy properties with a higher percentage downpayment, which should increase your monthly cash flow. So, with a fixed 60k downpayment, you`d buy lower value properties.

Numbers from a condo I bought recently, except I put less than 60k down, and paid less than 6% mortgage interest, but that is what you specified, so I`ll use it.

Purchase Price: 137000
Downpayment: 60000
Mortgage: 77000

Monthly Rent: 1200
Condo Fees: 382 (Rent and condo fees both include all utilities)
Maintenance/Reserve: 60 (5% of rents)
Insurance: 11
Property Tax: 80
Vacancy: 60
Mortgage Payment: 439 (6%, 35 year amort)

cash flow: 169

$169>100

Now, the expenses add up to 592, or 49.3% of rental, and the condo fees include ample reserve replacement. That and the current good reserve, plus a small reserve for repairs to the unit`s interior should be a reasonable estimate of expenses.

I believe that fits your original query. The property is located in Calgary.

Michael

 

[RedlineBrett]

QUOTE (invst4profit @ Jun 2 2009, 11:58 AM) Sorry for being so long winded but cash flow estimates is one of my pet peeves.

45-50% might be right. I can`t tell you you`re wrong only that if that is where you set the bar I bet you have leaky holes in your business. I would never tolerate 50% expenses in any of my properties... but then again I have 35 year amortizations with prime minus products that allow me to keep my costs down... thereby allowing me to have low rents and hardly any vacancies. I also only do 10% down and put money into improving properties so I`m not coming back them time and time again.

1% of purchase price equaling monthly rents simply doesn`t exist. Maybe it did in 1980 when Robert Allen put it in his first book. Old-school drum beating of this nature is one of my pet peeves... along with a pessimistic attitude towards acquisitions that requires they work with half the rents and no equity upside and all possible disastrous scenarios. Investors that follow this strategy might have the safest most ironclad portfolio in the world but it will be a fraction of the size of those that loosened their criteria and bought more that cashflowed less. They`ll have one deal done when others will have 10.

 

[invst4profit]

"As a possible answer for your specific question, you could buy properties with a higher percentage down payment, which should increase your monthly cash flow. So, with a fixed 60k downpayment, you`d buy lower value properties."

Throwing cash at a bad deal does not improve the quality of the deal.
If that were the case any property at any price could have positive cash flow regardless of how much you charge for rent simply by buying with cash.
The calculation of "true" cash flow should be calculated based on 100% financing.
You can not "force" cash flow by throwing money at a deal.



"45-50% might be right. I can`t tell you you`re wrong only that if that is where you set the bar I bet you have leaky holes in your business. I would never tolerate 50% expenses in any of my properties... but then again I have 35 year amortizations with prime minus products that allow me to keep my costs down... thereby allowing me to have low rents and hardly any vacancies. I also only do 10% down and put money into improving properties so I`m not coming back them time and time again."

Other than buying new homes and keeping them short term there is no way to avoid 50% expenses over the life of a building. I assume when you say you would not tolerate 50% expenses you are saying you do not hold properties long term.
Personally setting my bar at 50% expenses allowed me money to insure my business is tight as a frogs butt. Water tight.
I do not understand your statement regarding your mortgage term. Expenses do not include debt repayment.
Your property improvements,as well as repairs and general upkeep, are expenses and are required on a ongoing bases as a structure ages. And although your theoretical savings may allow you to keep rents lower than market this cancels out your lower vacancy rates as a total cash flow so I do not see any advantage.
What you are saying is you have expenses but do not include them in your expense calculations. Nor did you include many other expenses as I mentioned previously.



"1% of purchase price equaling monthly rents simply doesn`t exist. Maybe it did in 1980 when Robert Allen put it in his first book. Old-school drum beating of this nature is one of my pet peeves... along with a pessimistic attitude towards acquisitions that requires they work with half the rents and no equity upside and all possible disastrous scenarios. Investors that follow this strategy might have the safest most ironclad portfolio in the world but it will be a fraction of the size of those that loosened their criteria and bought more that cash flow less. They`ll have one deal done when others will have 10."


1% does exist maybe just not where you chose to shop.
The property I bought last year for $400,000 has a rental income of $5900/month. There are plenty of properties all over Ontario that easily meet and many exceed 1%. I am certain many others can support that fact.

Your approach to playing loose with your criteria indicates to me that your business model leans more toward speculating on appreciation which is fine but not my approach to business.
I do not focus on future wealth, although that may happen, my business plan is to use cash flow to put food on the table.
Your 1 in 10 example may be accurate but only 1 in 10 investors want more than a small number of properties. I do not view this business as a competition to see who owns the most property. I would guess that is just as true with REIN members.
Personally I would rather have one good deal that I can count on than 10 mediocre ones that I have to speculate on. But that is only my chosen business model.
Your business, which I am certain is successful, being much larger may be able to afford greater risk.

 

[RedlineBrett]

QUOTE 1% does exist maybe just not where you chose to shop.
The property I bought last year for $400,000 has a rental income of $5900/month. There are plenty of properties all over Ontario that easily meet and many exceed 1%. I am certain many others can support that fact.

Well this thread was created to see what investors could do in the market right now and I have not seen one post other than yours that reflects the 1% rule and there are a couple hundred views on this thread already. If deals like this were so prevalent we would be hearing more about them. What I will say is they don`t exist in western Canada.

QUOTE "Other than buying new homes and keeping them short term there is no way to avoid 50% expenses over the life of a building. I assume when you say you would not tolerate 50% expenses you are saying you do not hold properties long term.
Personally setting my bar at 50% expenses allowed me money to insure my business is tight as a frogs butt. Water tight."

I`m not going to argue your 50% - even if I don`t believe it. You seem pretty convinced of that. What I will take issue with is forcing cash flow to deal with all possible expenses related to a property when the 40 year historical average for my market shows just over 6% capital appreciation per year. Makes complete sense with rising populations and no new land being created so I use that as a base assumption in my selection criteria.

If you are going to include all of the bad you need to include all of the good. I don`t stare at the raw cash flow my properties earn. That is only one piece of the puzzle. The truest measure of a deal is not cash flow at 100% finance it is rate of return - which brings in the opportunity cost of capital and allows you to measure your real estate investments against other investment options. If throwing an extra 10k at a property doesn`t hurt the ROR that badly and provides the appropriate cushion for operations then it is a sound move.

QUOTE "I do not focus on future wealth, although that may happen, my business plan is to use cash flow to put food on the table.
Your 1 in 10 example may be accurate but only 1 in 10 investors want more than a small number of properties. I do not view this business as a competition to see who owns the most property. I would guess that is just as true with REIN members.
Personally I would rather have one good deal that I can count on than 10 mediocre ones that I have to speculate on. But that is only my chosen business model."

Well like many REIN members I choose to work to put food on the table and consider my investments to be a `retirement plan` and eventually allow me to transition away from sales and to another part of my business. If you are eating off your cash flow then your standpoint makes more sense to me. I am pretty cutthroat with my sales career and I see the same approach in you with respect to your income properties. No problem - I just don`t see it as the quickest path to wealth.

Future wealth and the hope of a better life is why anyone makes any investment. I would bet if you asked all REIN members with 10 properties or more to contrast their wealth vs. that of their `normal` friends that only have one property I bet you would see a very convincing stat. If you have $5,000,000 of assets in a market that has done 6%/yr over 40 years you will gain more than someone with only $500,000. This is why I elect to do a higher volume of thinner deals. You can call it speculation... but you are speculating the sun will come up every morning too!

 

[invst4profit]

All valid points.
We can agree to disagree on the 50% rule.

Business wise I understand the difference in approach.
You are in sales where as I am months away from early retirement and have all the wealth I desire.

 

[RedlineBrett]

QUOTE (invst4profit @ Jun 3 2009, 10:51 AM) You are in sales where as I am months away from early retirement and have all the wealth I desire.

Wow must be a great feeling! The reason we are all in real estate is to accomplish that goal. Congratulations!

 

[bizaro86]

QUOTE (invst4profit @ Jun 3 2009, 08:30 AM) "As a possible answer for your specific question, you could buy properties with a higher percentage down payment, which should increase your monthly cash flow. So, with a fixed 60k downpayment, you`d buy lower value properties."

__________________________________________________________________________

Throwing cash at a bad deal does not improve the quality of the deal.
If that were the case any property at any price could have positive cash flow regardless of how much you charge for rent simply by buying with cash.
The calculation of "true" cash flow should be calculated based on 100% financing.
You can not "force" cash flow by throwing money at a deal.

I completely agree with you. If a property wouldn`t work with 100% financing, the numbers are probably too tight.

However, the original poster sounded like he wanted a stress test type property, being worried about potentially higher future interest rates. One way to decrease the risk in your portfolio is to use more cash.

Michael

 

[housingrental]

Re Brett Vs Greg post
My thoughts are closer to Greg`s but..
50% ... some things that might influence long term reduction of this number are:
Tenants paying utilities
Higher rental rates per type of unit
Not including periodic replacement of items and aesthetic upgrades

As an example - take a 2400 sqft above grade + basement.
1) Student building setup as triplex, - 3 x 5 units - 15 beds - rents for $81000 per year tenant pay utilities
2) Single family house, utilities included - rents for $22000 per year

For 1) expense ratio could be 30%... and maybe 35% long term when averaging in long term repairs and replacement and upgrades
For 2) expense ratio could be 60% + !

 

[nav1940]

QUOTE (invst4profit @ Jun 3 2009, 09:51 AM) All valid points.
We can agree to disagree on the 50% rule.

Business wise I understand the difference in approach.
You are in sales where as I am months away from early retirement and have all the wealth I desire.


what percentage do you use if utilizes are include in your rent. just wondering??? I have been useing your rule of 50% it has worked well for me so far.