Archive for the ‘Real Estate’ Category
Positive Rental Cash Flow – The True Secrets
The new real estate investor asked, “Please explain to me what is so hard about getting me a positive rental cash flow on a property your group sponsors.” Why is it so hard for a bulk group like you guys to simply get me a property in a appreciating area, with strong rental cash flow, and with little down?”
Depending on what an investor is willing to accept as a purchase price compared the market price, they may be right.
But it may or may not be in the investor’s best interest to create a scenario such as developers doing four years with no mortgage payments to cater to their desires. By doing this they are creating the positive cash flow.
The last few years since the real estate explosion, newer investors do not have the understanding as to what is realistic and practical. What we are going to do today is just put some reality back into the goal for break even or positive rental cash flow. I will show you that you can create OUTSTANDING rental real estate investments with the following characteristics:
* 10% true discount to market value;
* Neutral cash flow with 10% down;
* Expected appreciations of 5%+;
Sounds easy enough! But what you will realize in this article is that in most areas, these opportunities realistically DO NOT EXIST. To find these type of investments in volume, you must be creative. That is what we do on a daily basis.
Why is this so difficult to do? Prices compared to rents have skyrocketed compared to historical values. In a moment, I will be giving you a spreadsheet and video so you can see for yourself how this really works. In the meantime take my word on the following.
“To create neutral/positive rental cash flow, you will most likely need gross rents to be 1% of the purchase price per month”.
For example if you buy a property for $150,000.00 and put 10% down. For this to be a neutral cash flow, you will need to charge $1,500.00 per month for rent. If you don’t understand the real world issues of real estate such maintenance, vacancies, etc., this is much easier on paper than in reality.
Many homes in parts of Florida are typically selling for $250,000.00. By applying our last scenario we would need to charge $2,500.00 per month in rent to achieve neutral cash flow. We honestly are seeing rents closer to 0.5% rather than the 10% per month, this is a far cry from being a positive rental cash flow.
For investors to want to buy developers have had to resort to offering
* leaseback
* HOA payments;
* tax payments
* cash back at close;
* mortgage payments;
* other incentives to make it look attracting and worthwhile.
As there is nothing wrong with offering incentives, just keep in mind that the developers are in it to make money also. The more money committed to making your property neutral rental cash flow (which translates to money out of there pockets), then there is less to offer discounts to the market. I personally like real world discounts and neutral cash flow.
Just understand that it is harder for developers to create good sensible opportunities for investors if the rent to prices are out of whack in the area. The next time you are looking at an opportunity know what the ratio between the purchase price and the REGULAR RENTS… this will give you a good understanding about what is really going on.
By: Chris Anderson, PhD
About the Author:
Depending on what an investor is willing to accept as a purchase price compared the market price, they may be right.
But it may or may not be in the investor’s best interest to create a scenario such as developers doing four years with no mortgage payments to cater to their desires. By doing this they are creating the positive cash flow.
The last few years since the real estate explosion, newer investors do not have the understanding as to what is realistic and practical. What we are going to do today is just put some reality back into the goal for break even or positive rental cash flow. I will show you that you can create OUTSTANDING rental real estate investments with the following characteristics:
* 10% true discount to market value;
* Neutral cash flow with 10% down;
* Expected appreciations of 5%+;
Sounds easy enough! But what you will realize in this article is that in most areas, these opportunities realistically DO NOT EXIST. To find these type of investments in volume, you must be creative. That is what we do on a daily basis.
Why is this so difficult to do? Prices compared to rents have skyrocketed compared to historical values. In a moment, I will be giving you a spreadsheet and video so you can see for yourself how this really works. In the meantime take my word on the following.
“To create neutral/positive rental cash flow, you will most likely need gross rents to be 1% of the purchase price per month”.
For example if you buy a property for $150,000.00 and put 10% down. For this to be a neutral cash flow, you will need to charge $1,500.00 per month for rent. If you don’t understand the real world issues of real estate such maintenance, vacancies, etc., this is much easier on paper than in reality.
Many homes in parts of Florida are typically selling for $250,000.00. By applying our last scenario we would need to charge $2,500.00 per month in rent to achieve neutral cash flow. We honestly are seeing rents closer to 0.5% rather than the 10% per month, this is a far cry from being a positive rental cash flow.
For investors to want to buy developers have had to resort to offering
* leaseback
* HOA payments;
* tax payments
* cash back at close;
* mortgage payments;
* other incentives to make it look attracting and worthwhile.
As there is nothing wrong with offering incentives, just keep in mind that the developers are in it to make money also. The more money committed to making your property neutral rental cash flow (which translates to money out of there pockets), then there is less to offer discounts to the market. I personally like real world discounts and neutral cash flow.
Just understand that it is harder for developers to create good sensible opportunities for investors if the rent to prices are out of whack in the area. The next time you are looking at an opportunity know what the ratio between the purchase price and the REGULAR RENTS… this will give you a good understanding about what is really going on.
By: Chris Anderson, PhD
About the Author:
Dr. Chris Anderson is the founder of GetPreconstructionDeals.com. To get his detailed video about
positive rental cash flow, please visit today.
positive rental cash flow, please visit today.
Eula Franchette
What Type of Cash Flow are You Dealing With?
One of the most misunderstood and commonly mistaken terminologies in real estate is cash flow. Every person and every business requires cash flow in order to survive. The question to ask is: what kind of cash flow are we talking about?
When I first started real estate investing, I remember this scenario as a perfect example of how a novice can misunderstand the principles of cash flow and land up in big trouble a few months later. Here’s the story:
We received a call from a business associate just starting out in real estate. He called to run the numbers by us to make sure the deal was as good as it looked on paper. He was buying a pre-sale condo and there was huge cash flow: a thousand dollars a month. We let him gush about the deal in order to vent his emotional fervor. This was red flag number one. Emotions never dictate a deal: only fundamentals. He was going to make a lot of money. Or so he thought … until we started asking him some clarifying questions.
What type of cash flow is the thousand dollars? Is it gross income, effective gross, NOI or net? Gross Income is the rent. Effective Gross Income is rent plus other income such as laundry and parking and less vacancy allowance. NOI, an acronym for Net Operating Income, is gross rent less operating expenses. Net Cash Flow is NOI less debt service. Debt service is your mortgage payment. Net Cash Flow is the bottom line and for me, this must be positive cash flow.
What is positive cash flow? This is the continuous flow of money over and above expenses and debt service that is deposited into your account every month just like a pay cheque. Positive cash flow equals freedom.
Less than five minutes later, we figured out quickly that our friend had neglected to deduct strata fees, property taxes, utilities, repairs and maintenance, factor in a vacancy allowance and – most importantly – his mortgage payments.
From a passive income perspective, the deal was a money drain. He would have been subsidizing the condo about $500 per month. This comes to $6,000 out of pocket expenses a year later. He didn’t have the fortitude to flip the property a year later.
Cash flow is intimately related to expenses. Both cash flow and expenses need to be managed and strategized. Some provinces have rent caps. Alberta has no rent caps which makes it an attractive place to buy investment property. Even so, the market dictates the rent amount. In an uptrending market, rents should always be managed up.
What are two types of expenses: operating and capital. These are some of the fixed operating costs associated with properties:
• Property taxes
• Property insurance
• Property management
• Utilities: water and sewer
• Utilities: electricity and oil & gas
• Repairs and maintenance
• Maintenance service contracts
• Refuse removal
• Vacancy allowance
• Advertising
• Bank charges
• Contingency allowance
A mortgage is not an operating expense. This is a debt service.
These are some of the capital costs associated with properties:
• Hot water tank
• Roof repair or replacement
• Appliance replacement
• Carpet replacement
• Electrical system upgrade
• Fire code upgrade
Capital expenses are capitalized. You cannot deduct 100% of these expenses all at once. This means that only an allowable percentage of the capital expense can be deducted each year similar to the capital cost allowance deductions for automobile deductions.
Owners of multi-family dwellings have a choice between creating an operating or capital expense. How? Suite by suite repairs and maintenance such as replacing the carpet and painting can be expensed. Replacing the carpet throughout the building and common areas or painting the entire building is a capital expense. These decisions are made in conjunction with our Bookkeeper and Chartered Accountant.
One of the most important calculations is the investor’s bottom line: their Cash-on-Cash Return. This is calculated using the Net Cash Flow per year and divided by the actual cash investment. Although this is not a true reflection of their total return on investment, it is a very powerful and compelling reason for investors to participate in your investment.
The next time you encounter cash flow issues, you have your clarifying questions to determine what type of cash flow you’re dealing with.
By: July Ono
About the Author:
When I first started real estate investing, I remember this scenario as a perfect example of how a novice can misunderstand the principles of cash flow and land up in big trouble a few months later. Here’s the story:
We received a call from a business associate just starting out in real estate. He called to run the numbers by us to make sure the deal was as good as it looked on paper. He was buying a pre-sale condo and there was huge cash flow: a thousand dollars a month. We let him gush about the deal in order to vent his emotional fervor. This was red flag number one. Emotions never dictate a deal: only fundamentals. He was going to make a lot of money. Or so he thought … until we started asking him some clarifying questions.
What type of cash flow is the thousand dollars? Is it gross income, effective gross, NOI or net? Gross Income is the rent. Effective Gross Income is rent plus other income such as laundry and parking and less vacancy allowance. NOI, an acronym for Net Operating Income, is gross rent less operating expenses. Net Cash Flow is NOI less debt service. Debt service is your mortgage payment. Net Cash Flow is the bottom line and for me, this must be positive cash flow.
What is positive cash flow? This is the continuous flow of money over and above expenses and debt service that is deposited into your account every month just like a pay cheque. Positive cash flow equals freedom.
Less than five minutes later, we figured out quickly that our friend had neglected to deduct strata fees, property taxes, utilities, repairs and maintenance, factor in a vacancy allowance and – most importantly – his mortgage payments.
From a passive income perspective, the deal was a money drain. He would have been subsidizing the condo about $500 per month. This comes to $6,000 out of pocket expenses a year later. He didn’t have the fortitude to flip the property a year later.
Cash flow is intimately related to expenses. Both cash flow and expenses need to be managed and strategized. Some provinces have rent caps. Alberta has no rent caps which makes it an attractive place to buy investment property. Even so, the market dictates the rent amount. In an uptrending market, rents should always be managed up.
What are two types of expenses: operating and capital. These are some of the fixed operating costs associated with properties:
• Property taxes
• Property insurance
• Property management
• Utilities: water and sewer
• Utilities: electricity and oil & gas
• Repairs and maintenance
• Maintenance service contracts
• Refuse removal
• Vacancy allowance
• Advertising
• Bank charges
• Contingency allowance
A mortgage is not an operating expense. This is a debt service.
These are some of the capital costs associated with properties:
• Hot water tank
• Roof repair or replacement
• Appliance replacement
• Carpet replacement
• Electrical system upgrade
• Fire code upgrade
Capital expenses are capitalized. You cannot deduct 100% of these expenses all at once. This means that only an allowable percentage of the capital expense can be deducted each year similar to the capital cost allowance deductions for automobile deductions.
Owners of multi-family dwellings have a choice between creating an operating or capital expense. How? Suite by suite repairs and maintenance such as replacing the carpet and painting can be expensed. Replacing the carpet throughout the building and common areas or painting the entire building is a capital expense. These decisions are made in conjunction with our Bookkeeper and Chartered Accountant.
One of the most important calculations is the investor’s bottom line: their Cash-on-Cash Return. This is calculated using the Net Cash Flow per year and divided by the actual cash investment. Although this is not a true reflection of their total return on investment, it is a very powerful and compelling reason for investors to participate in your investment.
The next time you encounter cash flow issues, you have your clarifying questions to determine what type of cash flow you’re dealing with.
By: July Ono
About the Author:
On The Beach Education Corporation was co-founded by July Ono a third generation
Vancouverite who is also a successful entrepreneur, real estate investor, educator, mentor and
millionaire. As the President of On The Beach Education Corporation, July is committed to sharing her passion and expertise for real estate
investing with others. Since 2004 she has been a keynote speaker and presenter at countless
events and has appeared on several radio programs and was recently profiled on the cover of Silke
Endress magazine, an international professional women’s magazine. She has reached thousands
of people through her monthly seminars, workshops and her monthly newsletter July News.
Ahmed Spigutz