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Why Won’t It Cash Flow?

kornel

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After doing neighborhood and city research within Kitchener-Waterloo and applying the findings to the property analyzer (using the ACRE system and other sources) I can’t seem to wrap my head around how based on market rental rates in the area a property could possibly cash flow. Clearly I’m missing something especially since KWC seems to be one of the top places to invest in Ontario. I would greatly appreciate your critique of this analysis:Location: Waterloo
Conservative rental rate for a 3 bdrm:
$1,000/month for a low to mid-end townhouse/semi with utilities not included.

Monthly Expenses:

Heat, Water, Hydro: $0.00 (paid by tenant)
Property Taxes: $180.67
Insurance: $100
Property Management: $100 (10% of gross rental income)
Vacancy Allowance: $68 (using 6.8% which is very conservative for the area)
Repairs & Maintenance: $80 (using 8% of gross rental income since property is 30-40 years old)
Lawn, Snow, Trash Removal: $0 (done by tenant)
Other: $20 (bookkeeping)

Net Operating Income: $451.33


Mortgage Expenses: Assuming a deal can be found for $160,000-$200,000.
Down payment (20%): $32,000
Mortgage Amount: $128,000
Even though a variable 5 year closed would be taken, we’re being conservative by using 5 year fixed rate to to ensure payments can be handled when rates jump.
Using RBC 5 year fixed with 35 amortization = 5.99%
This results in a monthly debt service payment of $722.69.

Net Cash Flow (monthly):
-$271.36.

In total, expenses make up 55% of the gross rental income which seems a little high. Even if I stopped being conservative with rents and assumed $1200 instead of $1000 in monthly income, the cash flow position would still be negative.

I would greatly appreciate any time you could dedicate to tearing apart this analysis. Clearly with so many successful REIN and non-REIN investors, there must be something critical I’m missing in my understanding of property operations and acquisitions.

Many Thanks.
Kornel Szrejber (future REIN member)
[email protected]
 

wgraham

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Check out our site to see exactly how we forecast our cash flowing properties. Historical Pro-formas Here

Finding Cashflowing properties is not easy and you will have to get creative. Look for properties with basement suites, garages, parking pads, storage areas, etc etc. You won`t find cash flow on most "regular" homes unless you put down a lot of cash. Rent to Owns can help with cash flow but there are other issues there and I wouldn`t recommend them until you have 3 to 5 properties under your belt at a minimum.

Another useful article that might help you out....5 ways to lose $50,000

Keep searching....you probably won`t find what you are looking for until you analyze 20 properties....takes a lot of work, time and perseverance....but they are out there.
 

Mecheng

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I don`t know the KW market but in Barrie you can get $1100 - $1400 for 3 brdm in that price range (property dependent of course).

Let take $1200 for rent and simply this using the 50% rule which state long term expenses will average 50% of gross rent.
This number is of course an average an your actual may vary from this dependent on the following:
1. Condition of property at purchase
2. Type of property
3. Type of tenant profile
4. Holding period relative to point (1.)

So Look at the following analysis:

Expenses: $600 ($1200 @ 50%)
Debt Service: $600 for neutral cash flow

For your debt service you used 5.99% interest rate in your analysis which gave $722.69 or -$122.69 cash flow.
If you believe rate will climb to 6% then over the next 5 yrs what average rate are you comfortable predicting for you analysis?

What if you expect to pay an average of 5% over your holding period?
Then you payment will be $641.82 or -$41.82 cash flow
This can then become positive cash flow at $1250 or $1300 rent.
Maybe one of the suggestions Wade made might get you to that rent.

Now I admit this is a very low cash flow and the cash on cash return is non-existent.
So you need to understand your ROI potential and determine if it`s worth it or not.

Your analysis is only a prediction of the properties potential and only as good as the assumptions you make.
You are not wrong to use larger safety factors and hedge interest rates. If you`re not comfortable with reducing these don`t.
Only you can decide if an investment fits your requirements or not.
 

Thomas Beyer

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QUOTE (kornel @ May 25 2010, 04:10 PM) .. the cash flow position would still be negative.

I would greatly appreciate any time you could dedicate to tearing apart this analysis. Clearly with so many successful REIN and non-REIN investors, there must be something critical I’m missing in my understanding of property operations and acquisitions.
Use
a) lower mortgages (say 5 years at low 4% range these days), and/or
b) a cheaper property in the 125 to 160K range, and/or
c) more cash down, and/or
d) more cash as reserves to cover negative cash-flow (as R&M, for example is not $80/month .. it is $500 or $2000 here and there .. there are months with 0 R&M .. then boom, the hotwater tank needs replacement or the evicted tenant leaves a $4000 mess behind)

20% down is EXTREMELY HARD to cash-flow in a 4%`ish to 5% mortgage environment in most growth (aka Top 10) markets .. and many a REIN member is finding it out the hard way !
 

Nir

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QUOTE (kornel @ May 25 2010, 04:10 PM) After doing neighborhood and city research within Kitchener-Waterloo and applying the findings to the property analyzer (using the ACRE system and other sources) I can`t seem to wrap my head around how based on market rental rates in the area a property could possibly cash flow. Clearly I`m missing something especially since KWC seems to be one of the top places to invest in Ontario. I would greatly appreciate your critique of this analysis:Location: Waterloo
Conservative rental rate for a 3 bdrm:
$1,000/month for a low to mid-end townhouse/semi with utilities not included.

Monthly Expenses:

Heat, Water, Hydro: $0.00 (paid by tenant)
Property Taxes: $180.67
Insurance: $100
Property Management: $100 (10% of gross rental income)
Vacancy Allowance: $68 (using 6.8% which is very conservative for the area)
Repairs & Maintenance: $80 (using 8% of gross rental income since property is 30-40 years old)
Lawn, Snow, Trash Removal: $0 (done by tenant)
Other: $20 (bookkeeping)

Net Operating Income: $451.33


Mortgage Expenses: Assuming a deal can be found for $160,000-$200,000.
Down payment (20%): $32,000
Mortgage Amount: $128,000
Even though a variable 5 year closed would be taken, we`re being conservative by using 5 year fixed rate to to ensure payments can be handled when rates jump.
Using RBC 5 year fixed with 35 amortization = 5.99%
This results in a monthly debt service payment of $722.69.

Net Cash Flow (monthly):
-$271.36.

In total, expenses make up 55% of the gross rental income which seems a little high. Even if I stopped being conservative with rents and assumed $1200 instead of $1000 in monthly income, the cash flow position would still be negative.

I would greatly appreciate any time you could dedicate to tearing apart this analysis. Clearly with so many successful REIN and non-REIN investors, there must be something critical I`m missing in my understanding of property operations and acquisitions.

Many Thanks.
Kornel Szrejber (future REIN member)
[email protected]

by a Plex then. P-R-O-B-L-E-M S-O-L-V-E-D! you`re welcome.
 

housingrental

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A few thoughts

Actual 5 year mortgage rates are much lower
Most properties around $200K should be able to rent for higher than $1000/month in Waterloo
You are correct, there isn`t much cash flow to be had from purchasing smaller properties in Waterloo with 20% DP when accurately forecasting longer term expenses

Your choices:
Put a higher down payment down
Look to other towns
Save up more money and look for more units in a property or student housing
Be willing to speculate on appreciation and absorb what will likely be a long term unprofitable business from operations - not recommended.
 

REINteam

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One quick comment - don`t know where you`re getting insurance or what type of extra coverage you have, but through the REIN™ partners I pay roughly $20/month for extremely good coverage for townhomes (little over $30/month if you only have 1 unit, drops to 20/month once you have 2 or more units insured). That`s a difference of $80/month saved...
 

JoeRagona

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QUOTE (REINteam @ May 26 2010, 01:41 PM) One quick comment - don`t know where you`re getting insurance or what type of extra coverage you have, but through the REIN™ partners I pay roughly $20/month for extremely good coverage for townhomes (little over $30/month if you only have 1 unit, drops to 20/month once you have 2 or more units insured). That`s a difference of $80/month saved...

Hi Ray,

I am probably looking at the same REIN partners as you and did not find that low of a price for my properties in Barrie. I am however looking at a secondary partner to see what their rates would be. I pay on average $50 per month on insurance now so that would definitely help.
 

Mecheng

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QUOTE (JoeRagona @ May 27 2010, 10:17 AM) Hi Ray,

I am probably looking at the same REIN partners as you and did not find that low of a price for my properties in Barrie. I am however looking at a secondary partner to see what their rates would be. I pay on average $50 per month on insurance now so that would definitely help.

Hi Joe,

I`m paying around $20/mth, give or take a buck, for my condo townhomes in Barrie.
Maybe the "condo" part is the reason for that, what type of properties you have (if its ok to ask)?

Come to think of it we only paid around $30/mth for our stater home which was freehold but comparable to our rentals.
 

invst4profit

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Something else to consider that most investors conveniently overlook when calculating cash flow is the lost income of the cash in the down payment.

$32000 invested at 5% is $1600 per year income. This is $1600 lost that should be considered as part of the expenses related to your investment property.

I have never understood the belief that income can be increased by increasing the down payment. One cancels out the other and therefor true cash flow does not change except in the respect of bragging rights among investors.

Calculating cash flow based on 100% financing is the best method of finding true cash flow that I know but I am of the understanding that many investors are not actually seeking true cash flow figures.
 

housingrental

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I think the problem is your trying to redfine terms from what there common meaning is

Cash flow is not calculated as you define.
Income is increased by increasing the down payment on a property. Your return on the income changes though (lower potential return, less risk, the higher the percent down)
That being said I agree an investor should look at the opportunity cost of the funds there using for a downpayment when determing the desreability of an investment.

QUOTE (invst4profit @ May 27 2010, 10:30 PM) Something else to consider that most investors conveniently overlook when calculating cash flow is the lost income of the cash in the down payment.

$32000 invested at 5% is $1600 per year income. This is $1600 lost that should be considered as part of the expenses related to your investment property.

I have never understood the belief that income can be increased by increasing the down payment. One cancels out the other and therefor true cash flow does not change except in the respect of bragging rights among investors.

Calculating cash flow based on 100% financing is the best method of finding true cash flow that I know but I am of the understanding that many investors are not actually seeking true cash flow figures.
 

invst4profit

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True enough.

What investors should really do is divide the income from the property attributing a portion to the property and a portion to the down payment.

Income and cash flow are two different entities. I include interest on the down payment as an expense against the income on a property in calculating cash flow. But I complicate matters even further by including principal as part of the debt repayment as well in calculating cash flow. I don`t believe in counting my chickens before they are hatched. I may not live that long.
 

JoeRagona

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QUOTE (Mecheng @ May 27 2010, 01:58 PM) Hi Joe,

I`m paying around $20/mth, give or take a buck, for my condo townhomes in Barrie.
Maybe the "condo" part is the reason for that, what type of properties you have (if its ok to ask)?

Come to think of it we only paid around $30/mth for our stater home which was freehold but comparable to our rentals.

I don`t want to hi-jack this thread but to answer the question, I am averaging out my insurance on all properties both Barrie and KWC. I do have townhomes in Barrie with insurance for $25 a month, $34 a month and $55 a month all depending on the age. However, the lower the rate, the lower the coverage and I`m a bit leary on that. I had a detached home insured for $65 a month and it was vacant for more than 5 months and after hearing horror stories and understanding I was not insured after the first 30, I applied for vacancy extension and it cost another $41 a month. Thank goodness I just sold that dog!
 

Thomas Beyer

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QUOTE (invst4profit @ May 27 2010, 08:30 PM) $32000 invested at 5% is $1600 per year income. This is $1600 lost that should be considered as part of the expenses related to your investment property.
I have never understood the belief that income can be increased by increasing the down payment. ..
First of all: where can you get 5% on your money ?

Secondly: yes opportunity cost
for both money and time should be considered .. but it is not an expense, just a comparison what else you could do with that cash or time !

Increased down payments increase cash-flow and lower risk !
 

ChrisDavies

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Thomas hit on a great distinction:

opportunity cost for both money and time should be considered .. but it is not an expense, just a comparison what else you could do with that cash or time!

When you buy stocks no one subtracts the interest they could have earned in a GIC. Also, if you`re investing using a LOC and only really having to pay the interest then your returns on even the most mediocre property become astronomical due to the double leverage.
 

Thomas Beyer

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QUOTE (ChrisDavies @ May 29 2010, 11:35 AM) Also, if you`re investing using a LOC and only really having to pay the interest then your returns on even the most mediocre property become astronomical due to the double leverage.
with the right cash-flowing and appreciating property only, mind you !

NOT all properties cash flow 100% levered (in fact: MOST DO NOT) .. and not all appreciate immediately .. thus a longer term 5+ year hold with at least break even cash-flow needs to be the minimum goal !!
 

invst4profit

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QUOTE (Thomas Beyer @ May 29 2010, 11:57 AM) First of all: where can you get 5% on your money ?
Secondly: yes opportunity cost
for both money and time should be considered .. but it is not an expense, just a comparison what else you could do with that cash or time !

Increased down payments increase cash-flow and lower risk !

How can one say it is not an expense when you have say $50,000 invested at X% receiving an INCOME and you pull it out to pay down a mortgage. Where does that income now come from that you formerly had. Obviously it must come from the rental income on the property.

By your thinking, if every investor is seeking investments that cash flow then every property that exists qualifies by simply paying cash to purchase. I could pay $1,000,000 cash for a property, charge $1000/month rent and bingo I have cash flow.
Obviously this is not your point, all respect to you Thomas, but my thinking will always be that throwing cash at a property does not create true cash flow. What it does is create two separate income streams. One attributed to the property and the other to your cash.
To each there own in crunching numbers.

Regarding lower risk I have always felt the more cash I had in a deal the higher my risk due to potential higher loss. I suppose risk is subjective.

As to where can one get 5%. I presently charge 9.5% on personal loans. When you consider credit cards at 18%-28% and people are in debt up to there eye balls its pretty easy to find people willing to borrow at what ever you want to charge. Small change and probably too much hassle for the big boys but it definitely supplements my income.
The really nice thing about being a LL is you have available needy customers not on your door step but actually inside
your door step.
 

housingrental

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Hi Greg

I need to repeat

Again you`ll have a tough time with this one

You`re trying to re-define the commonly accepted meaning of terms for no apparent reason
That is not an expense
As Thomas has pointed out it is an opportunity cost

I, and I`d assume everyone else who has posted agrees with you - It is appropriate and desirable to compare potential returns from alternate investment choices when deciding to purchase an income property.

Also note re " if every investor is seeking investments that cash flow then every property that exists qualifies by simply paying cash to purchase. I could pay $1,000,000 cash for a property, charge $1000/month rent and bingo I have cash flow." None of the posters have wrote this and this is not correct. You can, and there are properties that operate at less than a 0% cap rate - ie even when buying outright are cash flow negative.

Re " Regarding lower risk I have always felt the more cash I had in a deal the higher my risk due to potential higher loss. I suppose risk is subjective. "
It is viewed as higher risk because it is - There is higher break even point, there is more cash needed to service debt each month the less put as a down payment. So if things go wrong - vacancies, damages, etc.. - you will have a lower chance of losing money (or default!) the greater the initial down payment.
 

NickDavis

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QUOTE (housingrental @ May 30 2010, 12:48 PM) You`re trying to re-define the commonly accepted meaning of terms for no apparent reasonThat is not an expenseAs Thomas has pointed out it is an opportunity costSo, I`m breaking every rule here. I`m bringing back a dead hijacked thread..
Here is my INexperienced thoughts:

Assuming you take out $50,000 that you were earning 5% on to invest into a $150,000 property.

5% of $50,000
is $2500/year
or $12,500
after 5 years
Assuming a $150,000
property in a top ten town will appreciate at an average rate of 3% per year your property will be worth $173,900

So, basically you took your $50,000
investment that would earn you $12,500
over five years and used it to purchase a $150,000 that will earn you $23,900
in five years. Obviously we`re not mentioning real estate commissions or other closing costs; however, we`re also not mentioning monthly cash flow and mortgage pay down either.

I don`t think you can justify that there is a cost associated with the $50,000 because it what used to leverage $150,000 and earn an additional $11,400 plus mortgage pay down and cash flow.

Am I on the right track here?


Nick
 
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