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No more prime minus

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nepoez

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Hi all,

It`s me newbie again. Long time no post. So for those of you who have not read my other posts before, I started getting into investing in spring after 2 Quick Starts. As I live in Vancouver and want to invest in Edmonton, even though I had hoped to target suited properties for more cash flow, I went for strata condos/townhouses due to my distance. With the rates we had the past few months, town houses were working out really well for me and I was able to acquire 2 great homes (break even cash flow)with the help of some awesome team members I met on this forum. However, as the banks have stopped offering prime minus .5 deals, but prime plus 1-2 instead, the days of cash flowing town houses seem to be over for me. I`ve now no choice but to look for other property types, specifically suited properties. I`ve nothing againts those, but living distance makes it harder for me. Fortunately I have a good friend in AB who is partnering with me and he can take care of lots of stuff over there. However, he`s only going to do one with me after that I`m on my own again.

Anyways, I went off topic. Would anyone like to share with me if the recent changes had made you change your strategy?
 
QUOTE (nepoez @ Nov 3 2008, 10:29 PM) Hi all,

It`s me newbie again. Long time no post. So for those of you who have not read my other posts before, I started getting into investing in spring after 2 Quick Starts. As I live in Vancouver and want to invest in Edmonton, even though I had hoped to target suited properties for more cash flow, I went for strata condos/townhouses due to my distance. With the rates we had the past few months, town houses were working out really well for me and I was able to acquire 2 great homes (break even cash flow)with the help of some awesome team members I met on this forum. However, as the banks have stopped offering prime minus .5 deals, but prime plus 1-2 instead, the days of cash flowing town houses seem to be over for me. I`ve now no choice but to look for other property types, specifically suited properties. I`ve nothing againts those, but living distance makes it harder for me. Fortunately I have a good friend in AB who is partnering with me and he can take care of lots of stuff over there. However, he`s only going to do one with me after that I`m on my own again.

Anyways, I went off topic. Would anyone like to share with me if the recent changes had made you change your strategy?
prices of townhouses and condos have moved down 20% or so since mid 2007 in Edmonton, but rents have not .. so with lower prices they should still cash-flow even if interest rates are 40% higher (p-0.6% vs. P+ 1%, i.e. 3.4% vs. 5 %)
 
QUOTE (nepoez @ Nov 3 2008, 11:29 PM) the days of cash flowing town houses seem to be over for me. I`ve now no choice but to look for other property types, specifically suited properties.

Hello Nepoez,

I think that you`ll still be able to find CFing TH and suited properties in Edmonton regardless of the rate change. You could look at putting a slightly larger DP down as well, from 20% to 25% or extending the term to reduce payments and create more CF.

Another thought is to look at suited properties that through off more CF and hire a PM to take care of it. Of course you`d have to have that much more CF to support the cost of a PM.

I found more and more CF properties lately that work with a decent DP.

Regards,
 
Perhaps if my 20% down payment were cash then they would still cash flow. However, my down payment is from the HELOC which is currently 4%, the mortgage would be 5%. With the average town house in good shape renting out around 1300, that just doesn`t cover all the operating expense plus loan payments. Unless it is because I`m only looking at -$200k town houses and if I looked for higher class units, they could produce much higher income?
Anyways here`s a break down of what I currently have with 3.5% mortgage and break even. Increase the interest and it`s negative:


price: $181,000.00
rent: 1295/m

Morgage: 598.44/m at 35y amrt. 3.5%
heloc: 120/m at 4%
tax: 1045.0/y
pm fees: 129.5/m
reserve fund: 129.5/m
vacancy allowance: 64.75
low condo fees: 130.0
insurance: 20.0

total expense: about 1278



QUOTE (thomasbeyer2000 @ Nov 3 2008, 10:55 PM) prices of townhouses and condos have moved down 20% or so since mid 2007 in Edmonton, but rents have not .. so with lower prices they should still cash-flow even if interest rates are 40% higher (p-0.6% vs. P+ 1%, i.e. 3.4% vs. 5 %)
 
Hi, my first property was a triplex, my second a 4-plex. when I made the decision and purchased them it was much less common as FIRST properties to purchase. However, I think it is becoming a more and more favorable type due to the reasons you mentioned.
While I purchase in top areas, I like to see appreciation as a (very nice) bonus only and the business does not depend on that. therefore expected appreciation is not even mentioned in my model/analysis in excel. considering my personal goal to retire really soon, I give much more weight to Cash flow, more than an average investor.
However, in today`s environment multiplexes becomes a much more common investment property type as many more investors see cash flow as key. good luck.
 
As both of you have indicated, suited properties will be the favoured choice for CF. With no cash for down payment especially. Also, since I live in BC I have no choice but to employ a PM for each property. I think suited properties is no longer a preference for me but a necessity, unless I enjoy working to cover negative CF.

I`ve already changed my focus towards that. Do I have a confirmation that with no cash for down payment, there`s no cash flowing town houses in Edm?

Thanks again for the input!
 
Why do some investors believe down payment increases cash flow. This is not a sophisticated investment concept. It may add to the flow on one property but it decreases your overall cash flow.
As you invest in more properties do not lose site of the BIG picture.

You get a false sense of cash flow because your mortgage payment is smaller. In reality you are taking real cash and tying it up in a property without attributing any value to it.
Real world cash flow should be calculated assuming 100% financing on all property.
 
QUOTE (invst4profit @ Nov 4 2008, 07:32 AM) Why do some investors believe down payment increases cash flow. This is not a sophisticated investment concept. It may add to the flow on one property but it decreases your overall cash flow.
As you invest in more properties do not lose site of the BIG picture.

You get a false sense of cash flow because your mortgage payment is smaller. In reality you are taking real cash and tying it up in a property without attributing any value to it.
Real world cash flow should be calculated assuming 100% financing on all property.


I agree with Greg that cash flow should be calculated assuming 100% financing, but many REIN members have JV partners on their deals and the JV partner is responsible for coming up with the downpayment, so in essense if something doesn`t cash flow @ 20% down they have the jv partner come up with 25% of the dp or even 30%.

Terri
 
QUOTE (invst4profit @ Nov 4 2008, 06:32 AM) Real world cash flow should be calculated assuming 100% financing on all property.not quite .. as cash flow is cash flow .. and some to chose to go highly levered and some are conservative and go levered at 50% only (or 0% even as some insurance companies opr banks do when they buy a 6% CAP rate office tower in cash) and cash flow stronger !

What you are referring to is opportunity cost ..i.e. is this cash better invested elsewhere .. i.e. what choices do you have with your cash ? Usually, if you are 100% levered you are negative cash-flow ...
 
You`re right that putting your own cash into a deal is not as efficient in the bigger picture, but like Thomas said cash flow is cash flow. I might not make it to see the bigger return in the end if I sacrifice cash flow.

So again, I see both points and they are both facts that need to be considered, hence my switching to suited properties yet still 100% finance.
 
Correct.
I see all of my investment income as a big picture.
If I have my 30,000 invested with a monthly return of $XXX and decide to use it as a down payment on a property then I consider the first $XXX of rental income as return on my $30,000. The remainder of the rent is divided between all expenses and mortgage the extra being my positive cash flow.

If you borrow from yourself you need to charge the going rate for that loan or you end up losing money in the long term. By paying yourself first you are grounded in reality and know the true cash flow of a property.
Otherwise each month you are taking $XXX out of your own pocket to add to the rent check and telling yourself you have $XXX positive cash flow. (hello mom and pop landlord)
That is why increasing down payment does not increase cash flow on any given property it just redistributes investments from one income source to another.

All of this is assuming no partners.

nepoez:

The difference for me is I see my investments strictly as a rental business and make all my decisions accordingly. Cash flow is king. Appreciation is secondary, although nice to have in the back of your mind, but not something I count on and may never see.
One never knows when there time is up.
 
I`m not so sure if I sit well with the idea of investing in real estate and not expecting any appreciation and only seeing it as a nice to have bonus IF it happens. That defeats half the work done on the economic fundamental research to me.

QUOTE (invst4profit @ Nov 4 2008, 08:20 AM) Correct.
I see all of my investment income as a big picture.
If I have my 30,000 invested with a monthly return of $XXX and decide to use it as a down payment on a property then I consider the first $XXX of rental income as return on my $30,000. The remainder of the rent is divided between all expenses and mortgage the extra being my positive cash flow.

If you borrow from yourself you need to charge the going rate for that loan or you end up losing money in the long term. By paying yourself first you are grounded in reality and know the true cash flow of a property.
Otherwise each month you are taking $XXX out of your own pocket to add to the rent check and telling yourself you have $XXX positive cash flow. (hello mom and pop landlord)
That is why increasing down payment does not increase cash flow on any given property it just redistributes investments from one income source to another.

All of this is assuming no partners.

nepoez:

The difference for me is I see my investments strictly as a rental business and make all my decisions accordingly. Cash flow is king. Appreciation is secondary, although nice to have in the back of your mind, but not something I count on and may never see.
One never knows when there time is up.
 
Even using "economic fundamental research" appreciation is still only educated speculation to me.
There are an infinite number of uncontrollable variables that effect the future. Some may enjoy the warm fuzzy feeling that comes from anticipating investment appreciation but I have learned not to expect anything in life least of all anything to do with the economy.

The purchase price I offer on any property is based solely on my expected positive cash flow the day I take ownership. Most of the investment properties I see listed on the members section of this site I wouldn`t even waste my time putting an offer on. There is seldom much possibility of positive cash flow (at least not soon enough to buy groceries) which often therefore places too much emphasis on speculative appreciation.

Although I believe that every time the income from my property increases the value of my property should rise the only time I think about appreciation is the day I decide to sell.
This is how I run my business but I do realise everyone has there own plan and expectations. Keeping in mind I have no desire to be rich simply comfortable from month to month.

I guess I take the fun out of fundamental but I do enjoy rent day. My aviator is me on rent day.
 
QUOTE (invst4profit @ Nov 4 2008, 04:31 PM) Even using "economic fundamental research" appreciation is still only educated speculation to me.
There are an infinite number of uncontrollable variables that effect the future. Some may enjoy the warm fuzzy feeling that comes from anticipating investment appreciation but I have learned not to expect anything in life least of all anything to do with the economy.

So, does that mean you don`t expect that the rent you get next year will be the same or more than you`re getting this year?
I mean, if you invest in a sophisticated manner, there`s no reason to think that your rent will go down, but if you invest in a sophisticated manner, there`s also no reason to think that your place won`t appreciate, at least along with inflation.

Have a good one!

JohnS
 
Hi guys,

Let’s not confuse ourselves. The moment we agree on giving highest priority to cash flow, we are talking about the SAME strategy – buying the right properties in the right places.

The only differences is a psychological one - some lower expectations and some don’t. that`s it.

We buy the same properties, you expect a nice appreciation I see it as a nice bonus. Seriously, does it matter? we do the same thing
style_emoticons


Cheers,
Neil
 
Hehe.. the DOING is the same, but the intent and motives are slightly different. This difference usually matters more in personal relationships.. eg. some husbnds think it`s OK to look as long as you don`t touch. So a guy who always checks out other women is equal to a guy who is truly loyal to his wife? To the wife or a good honest man, they are not the same, even though on the surface they seem the same as no action is taken, however the underlying truth is night and day. I know, totally off topic but hey it`s Friday. Have a good weekend!



QUOTE (investmart @ Nov 4 2008, 04:57 PM) Hi guys,

Let`s not confuse ourselves. The moment we agree on giving highest priority to cash flow, we are talking about the SAME strategy – buying the right properties in the right places.

The only differences is a psychological one - some lower expectations and some don`t. that`s it.

We buy the same properties, you expect a nice appreciation I see it as a nice bonus. Seriously, does it matter? we do the same thing
style_emoticons


Cheers,
Neil
 
QUOTE (investmart @ Nov 4 2008, 07:57 PM) Hi guys,

Let`s not confuse ourselves. The moment we agree on giving highest priority to cash flow, we are talking about the SAME strategy – buying the right properties in the right places.

The only differences is a psychological one - some lower expectations and some don`t. that`s it.

We buy the same properties, you expect a nice appreciation I see it as a nice bonus. Seriously, does it matter? we do the same thing

Cheers,
Neil

But there actually is a matter of some contention here, as a lot of us don`t give highest priority to cashflow. I want cashflow in a town that is expected to appreciate as well. There are towns I know of with better cashflow than those on REIN`s Top Ten Town list, but they`re not on because they don`t have the same potential for longterm appreciation.

Don`t get me wrong....the cashflow is definitely needed, but it`s not the be-all and end-all.

Have a good one!

JohnS
 
We seem to have hijacked this thread. Sorry.

Neil and I seem to be on the same page.
To buy with cash flow you have to buy right. It would therefore follow that appreciation should happen but as Neil says it is not necessary in our business model.
Those of us in Ontario have difficulty with the anti Landlord policies here especially regarding rent increases and although I do expect our rents to go up every year (1.8% in 09) it barley covers increased costs. This again makes it crucial that we buy with good cash flow from day one.

The difference I see is there are two basic types of investors (starting out) in the area of real estate.

Type 1 (me).
I invested in a business not a investment property. The cash flow is my bread and butter without it I go bankrupt (in theory). I depend on it to pay by bills. Feed my family so to speak. I also pay down the mortgage. When I sell at age 70, or whatever (I am now 55), my income stops and I take the money from the sale, along with my other savings, to invest to create my retirement income. Real estate can go up, down or sideways and it matters very little to me except at that moment I sell the same as every owner. Along the way I am handyman, sheriff and social worker. I want my pay day today not somewhere down the road.

Type 2
These people are real estate investors in the true sense. There goal is to sell off some day and reap the rewards of appreciation. Positive cash flow is a nice bonus along the way but 0 or negative is tolerable as they are working toward the big pay off somewhere down the road. This type manages investments (paper work) and hires someone else to manage the business.

Type 3
Grey area somewhere in the middle but silently aspiring to be a type 2.

This is how I see individuals starting out in this arena. All of course can advance to the super group known as the corporate mogul where as we all know size does matter.

nepoez:
What time zone is Vancouver in? It`s only Wednesday here.
 
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