Definition of Cash Flow

[nepoez]

Hi Investors,

The way I`m planning on financing is to use HELOC for 25% down, and the rest is just mortgage.
Currently I consider cash flow as long as income is greater than all expenses, but excludes the interest on the HELOC. I consider that as my investment. So if the property gives me break even every month, I`m still putting in money from my own pocket to service the HELOC interest. Is this how most of you define cash flow?

Or does cash flow mean that the income has to cover everything including the HELOC`s interest?

Thanks,

Newbie

 

[MonteDobson]

If you can find a property that cash flows enough to cover your HELOC interest as well, buy it!! I typically run my cash-flow analysis based on 20-25% down and factor in the HELOC interest as the `cost of the investment`.

Others may have a different take on this??

 

[LeighF]

Nepoez
If your putting 20 -25% down using your HELOC, are you then applying for a 3rd mortgage for the rest? HELOC is typically called your second mortgage correct?

 

[terri]

Most people don`t consider their downpayment into their servicing expenses, but I am also using a l.o.c. for the downpayment so I do count it as part of the expense because it`s something that I have to pay every month. So basically I only buy properties that can break even or cash flow @ zero down, that`s how I do my analysis, but it all depends on your personal comfort level. Can you afford to eat that monthly expense or do you need your investment to cover it?


Terri

 

[MonteDobson]

QUOTE (Turtleford63 @ May 3 2008, 09:44 AM) Nepoez
If your putting 20 -25% down using your HELOC, are you then applying for a 3rd mortgage for the rest? HELOC is typically called your second mortgage correct?

Hi Turtleford,

The HELOC source Neopez is referring to would likely be from equity in their personal residence or another property, so no it would not be considered the 2nd or 3rd mortgage. You get a mortgage for 75-80% LTV and then utilize your personal LOC to fund the down payment.

 

[Thomas Beyer]

QUOTE (C2Ventures @ May 3 2008, 08:21 AM)
... You get a mortgage for 75-80% LTV and then utilize your personal LOC to fund the down payment.




IF your bank allows it .. as with tightening rules on lending more questions such as "where is the down payment coming from" will be asked more frequently .. Canadian banks have learned from US sub-prime fiasco and have tightened rules here at home .. as we also have higher risk mortgages now with 40 year amortization, 0% down with potential for negative equity ... so both CMHC and banks are more cautious !



related post: http://myreinspace.com/rein_members_only/Bookkeeping/87-4797-Buy_today__in_a_flat_economy_with_0_cash-flow_.html

 

[JRL]

Currently I consider cash flow as long as income is greater than all expenses, but excludes the interest on the HELOC. I consider that as my investment.

OK...but the new HELOC liability and resultant interest payments are driven by this new property`s purchase, so it absolutely needs to be taken into account when considering your net cash position.

Put it this way - you wouldn`t have this new interest payment commitment were it not for this new property. So, yes, it`s something you need to consider.

 

[Thomas Beyer]

QUOTE (JRL @ May 3 2008, 11:22 AM) Currently I consider cash flow as long as income is greater than all expenses, but excludes the interest on the HELOC. I consider that as my investment.
....

VERY VERY DANGEROURS .. as interest is an expense !!

the investment is the cash from the HELOC !

also include an allowance for repair and maintenance !

don`t fool yourself please by exclusing necessary expenses !!!

 

[nepoez]

That`s currect.

QUOTE (C2Ventures @ May 3 2008, 07:21 AM) Hi Turtleford,

The HELOC source Neopez is referring to would likely be from equity in their personal residence or another property, so no it would not be considered the 2nd or 3rd mortgage. You get a mortgage for 75-80% LTV and then utilize your personal LOC to fund the down payment.

 

[nepoez]

Hm...All the replies here seem to conflict with what I learned from the Quick Start I went to last month in Toronto... The way they taught was that the interest on the HELOC would be the investment.

But to me, your responses actually make more sense. When you invest in something you usually get what you invested back.. but the interest paid will never come back to you. However, look at it from the other side. If you had $40k non-borrowed CASH.. and you put that to the down payment as your investment.. although you are not paying interest on it .. you are LOSING potential interest paid to you by whoever you borrow to(Bank, private loan), or invest with.

Now should you put that lost interest as your expense since you are losing that income because you invested it in a property

 

[MonteDobson]

QUOTE (thomasbeyer2000 @ May 3 2008, 11:32 AM)
IF your bank allows it .. as with tightening rules on lending more questions such as "where is the down payment coming from" will be asked more frequently .. Canadian banks have learned from US sub-prime fiasco and have tightened rules here at home .. as we also have higher risk mortgages now with 40 year amortization, 0% down with potential for negative equity ... so both CMHC and banks are more cautious !



related post: http://myreinspace.com/rein_members_only/Bookkeeping/87-4797-Buy_today__in_a_flat_economy_with_0_cash-flow_.html




Yes you are correct...but the key is to "prove" that you have the ability to fund the down payment (ie. RRSP statement, stock statement, cash in bank account etc). Where you actually stroke the cheque from on closing day is up to you!!

 

[Thomas Beyer]

QUOTE (nepoez @ May 3 2008, 01:55 PM) .... However, look at it from the other side. If you had $40k non-borrowed CASH.. and you put that to the down payment as your investment.. although you are not paying interest on it .. you are LOSING potential interest paid to you by whoever you borrow to(Bank, private loan), or invest with.

that is called "opportunity cost" .. i.e. what else could you have done INSTEAD !

so if you invest 40K in a mutual fund and could have made say 5% .. then $2000 would be the opportunity cost .. you would NOT count this as cost .. just as a benchmark ...

QUOTE (nepoez @ May 3 2008, 01:55 PM) ...

Now should you put that lost interest as your expense since you are losing that income because you invested it in a property

an expense is only what you ACTUALLY spend .. so interest on a LOC for example !

QUOTE (nepoez @ May 3 2008, 01:55 PM) Hm...All the replies here seem to conflict with what I learned from the Quick Start I went to last month in Toronto... The way they taught was that the interest on the HELOC would be the investment.
...

you may have mis-understood .. the $s from the LOC would be the investment .. the INTEREST paid is the expense !

 

[nepoez]

QUOTE (thomasbeyer2000 @ May 3 2008, 06:58 PM) that is called "opportunity cost" .. i.e. what else could you have done INSTEAD !

so if you invest 40K in a mutual fund and could have made say 5% .. then $2000 would be the opportunity cost .. you would NOT count this as cost .. just as a benchmark ...



an expense is only what you ACTUALLY spend .. so interest on a LOC for example !



you may have mis-understood .. the $s from the LOC would be the investment .. the INTEREST paid is the expense !

I`m 99.9% sure that`s what they taught, as they said financing with HELOC is better return in terms of %. That statement would only make sense if the interest is considered the investment not the LOC, or else the % would be the same, or worse for using HELOC than cash.

PS. I`m not at all trying to argue.. I simply want to clear off the confusion I`ve got from the Quick Start and want to learn, by asking questions. I`ll let you guys know after this Quick Start what I hear.

 

[nepoez]

So I`ve come to a conclusion after much feedback that I will now calculate the HELOC incurred interest as expense right next to the other ones such as vacancy allowance, property tax, etc...

Thank for all the input and messages. I`ve now adjusted my property analysis sheet accordingly and break even properties are now exponentially harder to find in Edmonton.

for example.. now an assumed rental income of $1300 will require a purchase price of $165 at most! That`s a 3 bedroom for $165k.. where do you find that?

 

[Thomas Beyer]

QUOTE (nepoez @ May 4 2008, 01:33 PM) ...

for example.. now an assumed rental income of $1300 will require a purchase price of $165 at most! That`s a 3 bedroom for $165k.. where do you find that?

ON, SK, some smaller AB and BC towns .. make sure though the town is not going away as some BC forest towns are ..

hard to find in large cities like Red Deer, Edmonton, Toronto, Vancouver ... but maybe in sub-urbs like Camrose, Burnaby ...

 

[nepoez]

Thank you all very much for all the useful feed back!

QUOTE (thomasbeyer2000 @ May 4 2008, 01:17 PM) ON, SK, some smaller AB and BC towns .. make sure though the town is not going away as some BC forest towns are ..

hard to find in large cities like Red Deer, Edmonton, Toronto, Vancouver ... but maybe in sub-urbs like Camrose, Burnaby ...

 

[JRL]

I`m 99.9% sure that`s what they taught, as they said financing with HELOC is better return in terms of %. That statement would only make sense if the interest is considered the investment not the LOC, or else the % would be the same, or worse for using HELOC than cash.

Like Thomas said, the cash proceeds from the LOC are what you use for the initial down payment. Since you have to borrow that money, you can bet your ass that the lender will be making money off it - which is in the form of periodic interest payments, which is your cost to borrow their money.

Anyway, good to hear that you`re now incorporating these costs into your property analyses, as they certainly should be.

Let us know how it goes!

 

[nepoez]

I`m gonna TRY to do this. but I was also told by others that most realtors will not bother helping small fish like myself find such hard to find properties.. and I don`t doubt that... if I find out that that`s the case I guess I`ll either have to drop the bar or try to find it myself somehow, or perhaps look at other towns other than Edmonton which is what my main focus is right now.



QUOTE (JRL @ May 4 2008, 09:42 PM) I`m 99.9% sure that`s what they taught, as they said financing with HELOC is better return in terms of %. That statement would only make sense if the interest is considered the investment not the LOC, or else the % would be the same, or worse for using HELOC than cash.

Like Thomas said, the cash proceeds from the LOC are what you use for the initial down payment. Since you have to borrow that money, you can bet your ass that the lender will be making money off it - which is in the form of periodic interest payments, which is your cost to borrow their money.

Anyway, good to hear that you`re now incorporating these costs into your property analyses, as they certainly should be.

Let us know how it goes!

 

[invst4profit]

Actually Nepoez with expences eating up 50% of your rental income you will be hard pressed getting positive cash flow from $1300 rent on a $165000 purchase.

 

[JRL]

I was also told by others that most realtors will not bother helping small fish like myself find such hard to find properties.. and I don`t doubt that
Test assumptions! Personally, I have a tough time believing that you`ll have a difficult time finding a realtor to help you find properties. I would also suggest that you should do your research first, than rely on a realtor for support. If your constraint is time, maybe you should outsource your research? Try www.yourmaninindia.com. Let your new virtual assistant know the parameters with which you`re looking for (income growth, in-migration, etc.) and see what they can do. And trust me, this is not an expensive process. How does the tune of about $4/hour sound? Of course, you`ll want to specify that this job takes about 2-3 hours, or whatever you deem reasonable.

But keep in mind overall that moving houses is what feeds their family. And let`s be honest - it`s not like there`s a shortage of realtors out there. As to finding quality ones, and if you`re concerned about not being given proper personal attention, try a younger guy or someone just breaking into the business who`s got an interest in real estate investing. These guys have to start making money and will probably be more motivated than "established" agents elsewhere.