What to do with Cash Flow?

[CarrieKoch]

My husband and I just purchased our first duplex. Cash flow is over $600/monthly. We financed the down payment with an LOC so we are very leveraged, don`t have much there for repairs/vacancy savings.

I`m wondering what to do with the cash flow? We have a Manulife One mortgage so we can just leave it to accumulate and pay down mortgage (easily accessed for repairs or to purchase another property), or should we work on paying down the LOC`s which are at a higher interest rate, or should we go crazy and spend some of it ?? (and if we do what does it count as in our books? owners equity expense?)

Our ideal goal is to purchase another one soon so we`d like to work towards that.

Thanks!

 

[Thomas Beyer]

The word "and" is a key word in the English language !

So, certainly pay down expensive debt first.

AND

Save some $s, for example by paying down a re-advancable LOC so you can pay for the new roof, the new fridge or any major items that surely will creep into your newly found landlording life !

AND

Visit your favourite restaurant and order the most expensive item on the menu and leave a 25% tip for the waiter !

AND

Donate some $s to less fortunate

AND

Save some for the next real estate purchase

AND

Enjoy your life !

 

[CarrieKoch]

That sounds like great advice!!! That is an even bigger split than I imagined! I better find a way to create more money

 

[invst4profit]

Be very careful. If your cash flow of $600 is based on what is left after paying your debt you do not have a cash flow of $600/ month.
If you add in all of the expenses from insurance to vacancies you may end up with closer to $0 cash flow.
The first thing you should do is build up a $10,000 emergency fund along with sitting down and actually calculating what your real cash flow is.
If you have already done that you can obviously disregard my advice.

 

[CarrieKoch]

Yes, numbers based on paying all expenses. Because we have a Manulife One mortgage we can easily pull money back out to cover large repairs or vacancies. With the Manulife mortgage it`s interest only but we plan to also pay principal as well. Very quickly we`ll get our $10,000 in. But that is a great point and what we`ll work on first

 

[housedoc]

What`s a duplex go for in your area?
I`m trying to envision your numbers but keep shaking my head.
Is your cash flow made possibble by interest only payments, low interest rates and looong ammortization? Are your rents huge?
By financing 100% (what about transaction costs?) do you feel you`ve created $600/mo of free money.... "should we go crazy and spend some of it"??
A $10,000 reserve would take a year and a half to accumulate if you put in that 600 monthly.
How many properties do you have?
Help me out.

 

[invst4profit]

Yes $600 a month positive on a duplex does seem like a lot of money.
I am curious as well but more importantly concerned about being overly optimistic.
I have seen this get many investors in trouble. This is one of the main reasons I
chose to estimate expenses to be in the 45-50% range going in.

 

[CarrieKoch]

Rents 2050

Maintenance 102.5 RBC LOC 120 ING LOC 120 Utilities 90 Taxes 250 Ins 85 Mort P+I 719.3083

Leaving us with $563/month. Or am I missing something?
We purchased for $254 put down 20%. The front tenant pays all utilities and then we reimburse her 30% for the back unit.

 

[Sandy Fransham]

I have a manu-life mortgage as well. I keep a sub-account for our revenue property downpayments separate from the main account. My positive cash flow gets put into the main account (which is our mortagage for our residence) to pay that down first as it of course is not tax deductible. Of course since this mortgage acts like a HELOC, when I`m paying our personal debt down, it is "freeing up more money" for the downpayment on the next property. Did you use a separate LOC for your purchase or your Manulife One HELOC?

Sandy

 

[Thomas Beyer]

QUOTE (Sandy @ Aug 16 2009, 05:29 PM) ..Manulife One HELOC?
what is the interest rate on this ManuLife One LOC ?

Is it as good as advertised on TV ?

What are it`s pro`s and con`s ?

 

[CarrieKoch]

QUOTE (Sandy @ Aug 16 2009, 07:29 PM) I have a manu-life mortgage as well. I keep a sub-account for our revenue property downpayments separate from the main account. My positive cash flow gets put into the main account (which is our mortagage for our residence) to pay that down first as it of course is not tax deductible. Of course since this mortgage acts like a HELOC, when I`m paying our personal debt down, it is "freeing up more money" for the downpayment on the next property. Did you use a separate LOC for your purchase or your Manulife One HELOC?

Sandy


This is our first rental property so it`s our first Manulife mortgage. We used our RBC and ING LOC`s for down payment. I would like to accumulate the cash flow in the Manulife mortgage as it`ll be easily transferred to the next mortgage.


Thomas:
The Manulife mortgage is like a big line of credit (they call it a chequing account with large overdraft). So for example we are allowed to borrow up to 209,000. All the rents get deposited right into the Mortgage account. Then all the bills get paid right out of the account as well. The only real commitment is a $14 monthly service charge and you must pay interest every month. Then you can divide off a separate portion (without doing anything with the bank) for new purchase or take it out for a new roof. And the best part...the only fee to cancel the mortgage is $100! The rate for the mortgage we are paying is 3.25%. If we keep all the cash flow in there every month we are basically paying less interest.

This might be why i`m not as worried about vacancies and repairs and maintenance.

 

[invst4profit]

In my opinion your maintenance estimate is low. In addition to what you have included you have left out items like legal, accounting, advertising, evictions, vacancies, utilities when vacant, management (self or contracted) etc.
All expenses, excluding debt repayment, historically cost 45-50% of income. Many will argue closer to 35% long term but I disagree.
Regular expenses are easy to calculate. Insurance, taxes, etc. are generally fixed rates. Irregular expenses which are unexpected and unplanned such as roof, furnace, evictions, tenant damage, professional tenants can be quite expensive and too often underestimated.
You may get lucky and go a long time without any or you may get hit the first year. No one knows.

Using your numbers your income of $2050 monthly is $1091 after debt repayment.
With expenses at 35% your cash flow would be $374/ month. At 50% your positive cash flow would only be $66/ month. Split the difference and your cash flow may be closer to $220/month long term.

Either way long term your cash flow will be considerably below $600/ month.

 

[JoefromTO]

You asked other people`s opinions what you should do with the "extra" money. Some members are challenging the $600 cashflow...which is prudent. I`ll leave that alone for now and accept the $600 cashflow as a constant. It seems to me that you used 100% financing(which is what makes the "extra" money hard to believe...but nonetheless... I would use the extra money to pay back the LOC(s) first, then put the extra money back to the mortgage against the principle. With each Principal payment you make, your line of credit grows BUT you also have a positive affect on the amount of interest your paying with each of your required monthly mortgage payments. You won`t need to refinance in 5 years, you can just renew...unless your plans have changed. But after 5 years, you will have paid back the LOC(s) and reduced your overall debt and the reason this part is important is because you never know where the interest rates will be in 5 years but they are projected to be a couple % higher than what they are now...so...reduce your debt now before its too late! You`ll thank yourself.

I would not "go crazy and buy stuff...". Don`t get carried away...remember you techinically didn`t use any of your own money...so be responsible and pay down some debt.

Over time, the banks will see you as being responsible...which is a good thing...and chances are if and when you decide to buy another property, you will have an easier time getting a "yes".

Also, I`ll assume you plan on buying other properties. If you plan on using LOC`s each time, how will you be able to do that unless you pay back what you borrowed in the first place.

So to sum everything up, be conservative. It`s borring but smart...that`s my 2cents.

 

[CarrieKoch]

QUOTE (JoefromTO @ Aug 17 2009, 04:02 PM) You asked other people`s opinions what you should do with the "extra" money. Some members are challenging the $600 cashflow...which is prudent. I`ll leave that alone for now and accept the $600 cashflow as a constant. It seems to me that you used 100% financing(which is what makes the "extra" money hard to believe...but nonetheless... I would use the extra money to pay back the LOC(s) first, then put the extra money back to the mortgage against the principle. With each Principal payment you make, your line of credit grows BUT you also have a positive affect on the amount of interest your paying with each of your required monthly mortgage payments. You won`t need to refinance in 5 years, you can just renew...unless your plans have changed. But after 5 years, you will have paid back the LOC(s) and reduced your overall debt and the reason this part is important is because you never know where the interest rates will be in 5 years but they are projected to be a couple % higher than what they are now...so...reduce your debt now before its too late! You`ll thank yourself.

I would not "go crazy and buy stuff...". Don`t get carried away...remember you techinically didn`t use any of your own money...so be responsible and pay down some debt.

Over time, the banks will see you as being responsible...which is a good thing...and chances are if and when you decide to buy another property, you will have an easier time getting a "yes".

Also, I`ll assume you plan on buying other properties. If you plan on using LOC`s each time, how will you be able to do that unless you pay back what you borrowed in the first place.

So to sum everything up, be conservative. It`s borring but smart...that`s my 2cents.

Thanks Joe,

That sounds like great advice. And I am a really, really responsible person. Paying down debt is always my first priority.

We are planning to buy another this year....looking at a couple right now

 

[housedoc]

If I understand correctly, with a long amortization and interest only, you`re basically renting $250K for a forced return of ~7K/year if everything goes smoothly.
That`s 2.8%
But if you`ve put zero of your own money in, then the ROI is infinite?
A few more such deals and you`re living off the cash flow.
And because the properties will always appreciate, you can re-fi and pull even more money out.

Sounds great because everything always goes as planned.....right?

Is that how you build a portfolio or a house of cards?

I`m trying to understand, not be a d**k.

 

[CarrieKoch]

QUOTE (housedoc @ Aug 18 2009, 08:16 AM) If I understand correctly, with a long amortization and interest only, you`re basically renting $250K for a forced return of ~7K/year if everything goes smoothly.
That`s 2.8%
But if you`ve put zero of your own money in, then the ROI is infinite?
A few more such deals and you`re living off the cash flow.
And because the properties will always appreciate, you can re-fi and pull even more money out.

Sounds great because everything always goes as planned.....right?

Is that how you build a portfolio or a house of cards?

I`m trying to understand, not be a d**k.

I never said my intention was to pay interest only. I guess i`m new...thanks for pointing out the error of my ways. Am I wrong to be happy that we were able to purchase our first property for $5000 of our own money? Or would it have been better to refinance our personal residence? Or wait 5 years until we could save up money for a down payment? I think not. We found a flexible mortgage that will allow us options. All I was asking is where should the extra go? On the LOC`s or on the mortagage? Where is it more beneficial? In either case I`ll easily be able to access for repairs and maintenance.

Ps. My idea of going crazy is probably not the same as others.

 

[invst4profit]

Not on topic but since I see you are in the Barrie area here is a link to a valuable resource in the event you should have any tenant issues in the future.
You will also find her on the new Ontario Landlord site,, Ontariolandlord.ca.......

http://www.landlordlegal.ca/clients.html

 

[CarrieKoch]

QUOTE (invst4profit @ Aug 18 2009, 09:14 AM) Not on topic but since I see you are in the Barrie area here is a link to a valuable resource in the event you should have any tenant issues in the future.
You will also find her on the new Ontario Landlord site,, Ontariolandlord.ca.......

http://www.landlordlegal.ca/clients.html

Thanks Greg...we have used April in the past. With managing over 250 units we also have a very extensive do not rent to list and the owners at EPM are very familiar with LTB. I am lucky to have guidance in those matters.


I think my biggest error was using the word cash-flow when in actuality perhaps I mean the extra money that goes into the mortgage account every month.

 

[Mitch Collins]

QUOTE (invst4profit @ Aug 16 2009, 07:01 AM) Yes $600 a month positive on a duplex does seem like a lot of money.
I am curious as well but more importantly concerned about being overly optimistic.
I have seen this get many investors in trouble. This is one of the main reasons I
chose to estimate expenses to be in the 45-50% range going in.


That doesn`t seem overly high to me, Greg.

I`ve got 7 full duplexes that consistently cash flow well over $1,000 per month each after expenses. Just depends on the market.

Although it is critical that someone who is just getting into this takes the time to carefully analyze the expenses that can arise from owning property and make sure you always have enough on hand to deal with the worst case scenario!

And then when (not if) that happens, you will have to adjust your cash flow to repay your reserve funds until you have an adequate amount again.

Good luck!

 

[invst4profit]

I have never seen numbers anywhere close to that before. What percentage are your expences running at.