the 3 year rule to cashflow
- Thread starter ronda
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Many times if you buy a property with negative cash flow a 3 year time frame is reasonable for a owner to increase rent, make improvements (change tenants and adjust rents) refinance due to appreciation etc. to see positive cash flow.
If a investor has plenty of reserve funds and/or a good employment income this is possible (deep pockets).
Personally I only invest in properties that have a positive cash flow from day one.
They are harder to find, require more work, and are not suitable in most cases for armchair investors however one is much more likley to be successful with a new business that makes money rather than one that loses money.
Leave negative cash flow properties to the more experienced wealthy investors.
If a investor has plenty of reserve funds and/or a good employment income this is possible (deep pockets).
Personally I only invest in properties that have a positive cash flow from day one.
They are harder to find, require more work, and are not suitable in most cases for armchair investors however one is much more likley to be successful with a new business that makes money rather than one that loses money.
Leave negative cash flow properties to the more experienced wealthy investors.
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$200/ month cash flow?
Who`s numbers are those?
What are the expense numbers this is based on?
What is the purchase price including closing?
What are the rents?
How old is the building?
Are there repairs required?
What is your investment?
What is the cost of your debt?
Can`t really give good advice without actual numbers.
Who`s numbers are those?
What are the expense numbers this is based on?
What is the purchase price including closing?
What are the rents?
How old is the building?
Are there repairs required?
What is your investment?
What is the cost of your debt?
Can`t really give good advice without actual numbers.
QUOTE (invst4profit @ May 27 2008, 02:34 PM) $200/ month cash flow?
Who`s numbers are those?
What are the expense numbers this is based on?
What is the purchase price including closing?
What are the rents?
How old is the building?
Are there repairs required?
What is your investment?
What is the cost of your debt?
Can`t really give good advice without actual numbers.
Sorry about that. $200 month is after all expenses. The building is 10 years old. The purchase price including closing cost is $364000. The down payment is 20%. The down payment is cash that I have in my bank account. The utilities are paid by tenants. Taxes and ins are $280 a month. The rents are 1500 and 1200. Both sides are rented out month to month. There are no repairs needed. I hope this helps. Any advise would be great!
Who`s numbers are those?
What are the expense numbers this is based on?
What is the purchase price including closing?
What are the rents?
How old is the building?
Are there repairs required?
What is your investment?
What is the cost of your debt?
Can`t really give good advice without actual numbers.
Sorry about that. $200 month is after all expenses. The building is 10 years old. The purchase price including closing cost is $364000. The down payment is 20%. The down payment is cash that I have in my bank account. The utilities are paid by tenants. Taxes and ins are $280 a month. The rents are 1500 and 1200. Both sides are rented out month to month. There are no repairs needed. I hope this helps. Any advise would be great!
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QUOTE (ronda @ May 27 2008, 12:40 PM) I read on another post that Don Campbell said a property doesn`t really cashflow until the third year. Is this true? If it is why? Is there something I should be doing in those 3 years? The property I am talking about is a duplex and a 4 plex.
Rhonda,
I don`t know what post you read this on, however, I think what you read may be misunderstood or wrong. It depends on the property whether it cashflows or not, and Don always tells us to buy cash flow properties from the outset.
When refering to the 3 year time frame, Don did say that it takes that time before you really get going in real estate and feel the momentum of your investments, providing you have originally bought cash flow properties.
Rhonda,
I don`t know what post you read this on, however, I think what you read may be misunderstood or wrong. It depends on the property whether it cashflows or not, and Don always tells us to buy cash flow properties from the outset.
When refering to the 3 year time frame, Don did say that it takes that time before you really get going in real estate and feel the momentum of your investments, providing you have originally bought cash flow properties.
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Cost wise if you hold long term your expences will be in the 50% range. Budget $1350/ month for such things as insurance, repairs,routine maintance, taxes, evictions, vacancies, advertising, etc.
That will leave $1350 per month to go toward debt servicing and return on investment.
My best guestimate is you will have a very difficult time trying to get positive cash flow out of this property. If you can not get out of the deal you may want to shop long and hard for the lowest interest and longest amortization you can possibly get.
That will leave $1350 per month to go toward debt servicing and return on investment.
My best guestimate is you will have a very difficult time trying to get positive cash flow out of this property. If you can not get out of the deal you may want to shop long and hard for the lowest interest and longest amortization you can possibly get.
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QUOTE (ronda @ May 27 2008, 12:36 PM) The property (duplex) that I am looking at now is cashflowing $200 a month on a 25 yr mortgage. How do I decide what term to go for. What is better 3 yr, 5 yr? I want to keep the property for the long term. Should I try for a 40 yr mortgage?
All those decisions need to be made within the context of your long term plan. What is your exit strategy? how large will your portfolio be? How large is it now? What lenders are you with?
If you plan on building a large portfolio, its important that you are working with a broker who understands revenue property financing and can help you to employ a portfolio strategy to the properties that you are purchasing. Choosing the right lenders and products in the beginning always helps you to maximize that amount of financing that you would qualify for. Your long term plan will dictate which products and terms should be taken for which properties.
Hope that helps,
All those decisions need to be made within the context of your long term plan. What is your exit strategy? how large will your portfolio be? How large is it now? What lenders are you with?
If you plan on building a large portfolio, its important that you are working with a broker who understands revenue property financing and can help you to employ a portfolio strategy to the properties that you are purchasing. Choosing the right lenders and products in the beginning always helps you to maximize that amount of financing that you would qualify for. Your long term plan will dictate which products and terms should be taken for which properties.
Hope that helps,
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QUOTE (ronda @ May 27 2008, 12:40 PM) I read on another post that Don Campbell said a property doesn`t really cashflow until the third year. Is this true? If it is why? Is there something I should be doing in those 3 years? The property I am talking about is a duplex and a 4 plex.
Hi Ronda,
This may have been from one of my posts. I should add some caveats.
We have bought all our with zero down of our own money. Even if we did use our own money for the down payment, we would at least calculate the interest we have lost by not having it sit in a money master account (low risk investment 3 %). There are a few threads which debate the definition of cash flow, you`ll come up with one you are comfortable with. From reading your post, I got the impression that you expect to get $200 each month that you can use for something other than on the property itself.
We buy cash flowing properties (by initial estimate) but the only way to know if they are truly cash flowing is at year end, subtract all expenses attributable to that property from the actual income received from it.
I was intrigued by Greg`s post where he uses expense estimates of 50 % of the rent. I went back to the property analyzer sheets of the last few properties that I bought. I realized they each came in around 45 %.
I believe Don said that don`t expect any actual money from a property for 3 years (12-18 months ago) but he is the only one who can clarify that statement. Whatever the true statement, I have found it to be a useful rule of thumb for my investment system. It allowed us to keep going when things looked hairy and the financial side didn`t impact our personal life (finanacially).
Hope this helps,
Heather
Hi Ronda,
This may have been from one of my posts. I should add some caveats.
We have bought all our with zero down of our own money. Even if we did use our own money for the down payment, we would at least calculate the interest we have lost by not having it sit in a money master account (low risk investment 3 %). There are a few threads which debate the definition of cash flow, you`ll come up with one you are comfortable with. From reading your post, I got the impression that you expect to get $200 each month that you can use for something other than on the property itself.
We buy cash flowing properties (by initial estimate) but the only way to know if they are truly cash flowing is at year end, subtract all expenses attributable to that property from the actual income received from it.
I was intrigued by Greg`s post where he uses expense estimates of 50 % of the rent. I went back to the property analyzer sheets of the last few properties that I bought. I realized they each came in around 45 %.
I believe Don said that don`t expect any actual money from a property for 3 years (12-18 months ago) but he is the only one who can clarify that statement. Whatever the true statement, I have found it to be a useful rule of thumb for my investment system. It allowed us to keep going when things looked hairy and the financial side didn`t impact our personal life (finanacially).
Hope this helps,
Heather
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The 50% rule is a rough estimate arrived at by researching (not me personally)
literally hundreds of thousands of rental units of all types across north america over many decades.
It is however only a guide line and every property varies from year to year.
Personally I believe it is a very valid guideline that I always used when evaluating a property.
I also always calculated lost income on cash investment at 10% or better as that is a minimum I
can generally get on investments year over year.
literally hundreds of thousands of rental units of all types across north america over many decades.
It is however only a guide line and every property varies from year to year.
Personally I believe it is a very valid guideline that I always used when evaluating a property.
I also always calculated lost income on cash investment at 10% or better as that is a minimum I
can generally get on investments year over year.
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- Aug 22, 2007
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- 2,005
To clarify,
If you invest in real estate based on long-term fundamentals you will really start to see the results about 3 years out (i.e appreciation, re-finance opportunities etc).
Properties should be bought for cash flow from the beginning, as that is where the freedom come from.
If you invest in real estate based on long-term fundamentals you will really start to see the results about 3 years out (i.e appreciation, re-finance opportunities etc).
Properties should be bought for cash flow from the beginning, as that is where the freedom come from.
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QUOTE (ronda @ May 27 2008, 12:40 PM) I read on another post that Don Campbell said a property doesn`t really cashflow until the third year. Is this true? If it is why? Is there something I should be doing in those 3 years? The property I am talking about is a duplex and a 4 plex.
yes, it takes about 2 years to substantially improve an asset .. then often you can re-finance based on higher rents or value .. and IF this is the goal then a 25 year amortization has no value .. so interest olny or 40 year is preferred as in the current low interest environment paying down principal helps only one party: the bank.
yes, a 50% expense ratio before mortgage payment is a good rule of thumb, unless tenants pay utilities ..
yes, it takes about 2 years to substantially improve an asset .. then often you can re-finance based on higher rents or value .. and IF this is the goal then a 25 year amortization has no value .. so interest olny or 40 year is preferred as in the current low interest environment paying down principal helps only one party: the bank.
yes, a 50% expense ratio before mortgage payment is a good rule of thumb, unless tenants pay utilities ..
QUOTE (thomasbeyer2000 @ May 30 2008, 05:36 PM) yes, it takes about 2 years to substantially improve an asset .. then often you can re-finance based on higher rents or value .. and IF this is the goal then a 25 year amortization has no value .. so interest olny or 40 year is preferred as in the current low interest environment paying down principal helps only one party: the bank.
yes, a 50% expense ratio before mortgage payment is a good rule of thumb, unless tenants pay utilities ..
And if tenants pay their own utilities, what expense ratio should we use?
Thanks,
Marcus
yes, a 50% expense ratio before mortgage payment is a good rule of thumb, unless tenants pay utilities ..
And if tenants pay their own utilities, what expense ratio should we use?
Thanks,
Marcus
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I still use 50% but you could use less maybe 45%.
Remember the expences that cost the most are not regular month
to month. They are unexpected. Extended vacancy, drawn out evictions with
no rent payments, repairs not covered by insurance, new roof siding windows etc.
All items landlords dismiss with justification like "I have a one year lease, my house is only 10 years old etc."
Remember the expences that cost the most are not regular month
to month. They are unexpected. Extended vacancy, drawn out evictions with
no rent payments, repairs not covered by insurance, new roof siding windows etc.
All items landlords dismiss with justification like "I have a one year lease, my house is only 10 years old etc."
QUOTE (invst4profit @ May 31 2008, 01:01 PM) I still use 50% but you could use less maybe 45%.
Remember the expences that cost the most are not regular month
to month. They are unexpected. Extended vacancy, drawn out evictions with
no rent payments, repairs not covered by insurance, new roof siding windows etc.
All items landlords dismiss with justification like "I have a one year lease, my house is only 10 years old etc."
Thanks for answering this -- I was wondering too.
Remember the expences that cost the most are not regular month
to month. They are unexpected. Extended vacancy, drawn out evictions with
no rent payments, repairs not covered by insurance, new roof siding windows etc.
All items landlords dismiss with justification like "I have a one year lease, my house is only 10 years old etc."
Thanks for answering this -- I was wondering too.