How to make monthly INCOME
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QUOTE (investmart @ Feb 1 2009, 06:22 PM) Sean, In my example you do pay your investor from the first year. Why are you asking about selling to the investor "we don`t offer cashflow for several years"?
Investsmart,
I am talking about single-unit retail purchases not multi-unit wholesale purchases.
I`d like to play to in multi-unit sandbox, but my pockets are little shallow.
Investsmart,
I am talking about single-unit retail purchases not multi-unit wholesale purchases.
I`d like to play to in multi-unit sandbox, but my pockets are little shallow.
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QUOTE (investmart @ Feb 2 2009, 10:39 AM) Sean,
Isn`t a single-unit generating NO cash flow a very speculative investments in today`s situation?
I wouldn`t buy any but for the same reason I`m not an expert in the field of single families - I just don`t buy any.
Regards,
Neil
In the towns I watch, Edmonton or Calgary, the cash flow exists but is minimal - couple hundred a month until rents increase. I think that`s pretty typical of single family residential in Alberta. It`s not quite speculative, your returns are not 100% based on appreciation, but there is a significant appreciation requirement. My humble opinion anyway.
I think the run in Alberta over the last few years made investing pretty easy for those starting out. I think going forward for the next few years the wheat will be separated from the chaff.
Isn`t a single-unit generating NO cash flow a very speculative investments in today`s situation?
I wouldn`t buy any but for the same reason I`m not an expert in the field of single families - I just don`t buy any.
Regards,
Neil
In the towns I watch, Edmonton or Calgary, the cash flow exists but is minimal - couple hundred a month until rents increase. I think that`s pretty typical of single family residential in Alberta. It`s not quite speculative, your returns are not 100% based on appreciation, but there is a significant appreciation requirement. My humble opinion anyway.
I think the run in Alberta over the last few years made investing pretty easy for those starting out. I think going forward for the next few years the wheat will be separated from the chaff.
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QUOTE (investmart @ Feb 1 2009, 07:00 PM) Hi Thomas, looking back which of the 4 have your investors most commonly wanted/got? Thanks.
all 4 exists .. depending on age, other income, sophistication and risk tolerance !
all 4 exists .. depending on age, other income, sophistication and risk tolerance !
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QUOTE (thomasbeyer2000 @ Feb 4 2009, 09:45 AM)
all 4 exists .. depending on age, other income, sophistication and risk tolerance !
Hi Thomas, my question was which of the 4 specifically has been most common so far in your case? (I'm sure it's not 25%, 25%, 25%, 25%)
"it depends" we say before something happens. after it happens it's a fact and no longer depends when we talk about statistics, looking back historically. sorry, just wanted to clarify the difference because what I asked is NOT what it depends on but rather which of the 4 happened MOST for you? If you're not sure, that's fine ` no problem! just wanted to clarify the question. Thanks again, Neil
all 4 exists .. depending on age, other income, sophistication and risk tolerance !
Hi Thomas, my question was which of the 4 specifically has been most common so far in your case? (I'm sure it's not 25%, 25%, 25%, 25%)
"it depends" we say before something happens. after it happens it's a fact and no longer depends when we talk about statistics, looking back historically. sorry, just wanted to clarify the difference because what I asked is NOT what it depends on but rather which of the 4 happened MOST for you? If you're not sure, that's fine ` no problem! just wanted to clarify the question. Thanks again, Neil
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This may seem overly simple to some, but I am sometimes puzzled by the term cash flow. If two homes on the same block were identical with exact same costs and same rents how would the following work: Each house cost $300,000. Investor `A` of House 1 has loads of cash and makes a down payment of $200,000. Investor `B` puts a downpayment of $60,000 on House 2.
After all the montly payments, including mortgage, Investor `A` has a positive cash flow of $400. Investor `B`, because of the higher mortgage payment, has a negative cash flow of $400.
Is that a correct assumption? It would seem `wrong` to me. I believe that cash flow should be calculated as if the entire investment was financed. Otherwise, how can comparisons be made and it doesn`t take into account the opportunity cost of the downpayment.
Thanks for your time.
After all the montly payments, including mortgage, Investor `A` has a positive cash flow of $400. Investor `B`, because of the higher mortgage payment, has a negative cash flow of $400.
Is that a correct assumption? It would seem `wrong` to me. I believe that cash flow should be calculated as if the entire investment was financed. Otherwise, how can comparisons be made and it doesn`t take into account the opportunity cost of the downpayment.
Thanks for your time.
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QUOTE (islandplans @ Feb 6 2009, 03:16 PM) This may seem overly simple to some, but I am sometimes puzzled by the term cash flow. If two homes on the same block were identical with exact same costs and same rents how would the following work: Each house cost $300,000. Investor `A` of House 1 has loads of cash and makes a down payment of $200,000. Investor `B` puts a downpayment of $60,000 on House 2.
After all the montly payments, including mortgage, Investor `A` has a positive cash flow of $400. Investor `B`, because of the higher mortgage payment, has a negative cash flow of $400.
Is that a correct assumption? It would seem `wrong` to me. I believe that cash flow should be calculated as if the entire investment was financed. Otherwise, how can comparisons be made and it doesn`t take into account the opportunity cost of the downpayment.
Thanks for your time.
That`s why the term NOI (= CAP Rate in real estate) was invented. so we don`t have to ask "but what was your down-payment?" The CAP is the income AFTER expenses BEFORE financing, as a % of the property value. The CAP does not depend on the mortgage. In your example: House 1 CAP= House 2 CAP.
Neil
After all the montly payments, including mortgage, Investor `A` has a positive cash flow of $400. Investor `B`, because of the higher mortgage payment, has a negative cash flow of $400.
Is that a correct assumption? It would seem `wrong` to me. I believe that cash flow should be calculated as if the entire investment was financed. Otherwise, how can comparisons be made and it doesn`t take into account the opportunity cost of the downpayment.
Thanks for your time.
That`s why the term NOI (= CAP Rate in real estate) was invented. so we don`t have to ask "but what was your down-payment?" The CAP is the income AFTER expenses BEFORE financing, as a % of the property value. The CAP does not depend on the mortgage. In your example: House 1 CAP= House 2 CAP.
Neil
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QUOTE (islandplans @ Feb 6 2009, 04:16 PM) This may seem overly simple to some, but I am sometimes puzzled by the term cash flow. If two homes on the same block were identical with exact same costs and same rents how would the following work: Each house cost $300,000. Investor `A` of House 1 has loads of cash and makes a down payment of $200,000. Investor `B` puts a downpayment of $60,000 on House 2.
After all the montly payments, including mortgage, Investor `A` has a positive cash flow of $400. Investor `B`, because of the higher mortgage payment, has a negative cash flow of $400.
Is that a correct assumption? It would seem `wrong` to me. I believe that cash flow should be calculated as if the entire investment was financed. Otherwise, how can comparisons be made and it doesn`t take into account the opportunity cost of the downpayment.
Thanks for your time.
IslandPlans,
you are exactly right. Cash flow is the net left over after all expenses, including mortgage (P&I) payments. Your example is correct: some properties will cash flow when you purchase with 10% down and others require 20% or more down payment. Every property will be different. That`s what this whole "game" is about: finding properties that cash flow.
You have to find a balance that works for you and a strategy that works for you. Do you want higher cashflow or do you feel safer with a lower LTV? Am I holding long term and counting on appreciation? ETC.
As you will hear all the time, cash flow is King. If I`ve got cash flow and I`m holding long term I don`t need to worry that the values have dropped.
After all the montly payments, including mortgage, Investor `A` has a positive cash flow of $400. Investor `B`, because of the higher mortgage payment, has a negative cash flow of $400.
Is that a correct assumption? It would seem `wrong` to me. I believe that cash flow should be calculated as if the entire investment was financed. Otherwise, how can comparisons be made and it doesn`t take into account the opportunity cost of the downpayment.
Thanks for your time.
IslandPlans,
you are exactly right. Cash flow is the net left over after all expenses, including mortgage (P&I) payments. Your example is correct: some properties will cash flow when you purchase with 10% down and others require 20% or more down payment. Every property will be different. That`s what this whole "game" is about: finding properties that cash flow.
You have to find a balance that works for you and a strategy that works for you. Do you want higher cashflow or do you feel safer with a lower LTV? Am I holding long term and counting on appreciation? ETC.
As you will hear all the time, cash flow is King. If I`ve got cash flow and I`m holding long term I don`t need to worry that the values have dropped.
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QUOTE (islandplans @ Feb 6 2009, 03:16 PM) This may seem overly simple to some, but I am sometimes puzzled by the term cash flow. If two homes on the same block were identical with exact same costs and same rents how would the following work: Each house cost $300,000. Investor `A` of House 1 has loads of cash and makes a down payment of $200,000. Investor `B` puts a downpayment of $60,000 on House 2.
After all the montly payments, including mortgage, Investor `A` has a positive cash flow of $400. Investor `B`, because of the higher mortgage payment, has a negative cash flow of $400.
Is that a correct assumption? It would seem `wrong` to me. I believe that cash flow should be calculated as if the entire investment was financed. Otherwise, how can comparisons be made and it doesn`t take into account the opportunity cost of the downpayment.
Thanks for your time.
There are a few ways to do this. Your last paragraph works only if you are prepared to accept the same return on your cash as you are paying on the mortgage - and you probably aren`t OK with a return of 4% or 5%. So you might want to measure your cash on cash return - ie how much of a return are you getting on your cash invested? Does that help?
After all the montly payments, including mortgage, Investor `A` has a positive cash flow of $400. Investor `B`, because of the higher mortgage payment, has a negative cash flow of $400.
Is that a correct assumption? It would seem `wrong` to me. I believe that cash flow should be calculated as if the entire investment was financed. Otherwise, how can comparisons be made and it doesn`t take into account the opportunity cost of the downpayment.
Thanks for your time.
There are a few ways to do this. Your last paragraph works only if you are prepared to accept the same return on your cash as you are paying on the mortgage - and you probably aren`t OK with a return of 4% or 5%. So you might want to measure your cash on cash return - ie how much of a return are you getting on your cash invested? Does that help?
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QUOTE (islandplans @ Feb 6 2009, 03:16 PM) I believe that cash flow should be calculated as if the entire investment was financed. ..
one metric on real estate is yield or CAP rate (or P/E in the stock market)
a 2nd is cash-flow or cash-on-cash return
a modification of the 2nd, i.e. a 3rd one would be cash-flow + mortgage paydown, often referred to ROE (return on equity)
a 4th would be opportunity cost .. i.e. the 100K invested elsewhere
a 5th metric is risk adjusted return .. as different asset classes have different risk levels
one metric on real estate is yield or CAP rate (or P/E in the stock market)
a 2nd is cash-flow or cash-on-cash return
a modification of the 2nd, i.e. a 3rd one would be cash-flow + mortgage paydown, often referred to ROE (return on equity)
a 4th would be opportunity cost .. i.e. the 100K invested elsewhere
a 5th metric is risk adjusted return .. as different asset classes have different risk levels
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Thank you Investmart, Cargren, Garth and Thomas for taking the time to reply. Shows me different ways of looking at the process. All good info.
Thanks.
Thanks.
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QUOTE (SeanKozicki @ Feb 1 2009, 06:17 PM)
Thomas,
I have a couple of follow-up questions based on the premise that "cashflow on newly acquired properties is typically low".
1. How do you position a real estate deal to a potential JV partner when housing prices are expected to remain flat or depreciate over the next 12-18 months? There won't be a significant return from cashflow until rents increase (or you decrease expenses), or a paper equity gain for several years out.
2. How do directed real estate RRSP investments work? I understand that you need to pay a reasonable annual return (5-10%) to your investor. Where does that cash come from? You could ask for more money than you need and pay them back their own money, but you will probably run out before you cashflow catches up.
Hi Sean:
The way we position deals were current cash flow is low is as follows. Our strategy is to allows buy properties significantly aprraised market value (at least 5-10%). Therefore, the JV partners are profiting from their investment from day one - given the built in equity the all of our deals offer.
Therefore, even if the cash flow is relatively low, the Return on Investment to the investors is still attractive.
The challenge may be to find deals that meet this criteria. Through constant research and expert negotiation, we have been able to secure such deals in Alberta Top 10 Towns.
The other item that we highligh is that investors will generate returns from the mortgage principal paydown that happens every month/year.
Hope this helps.
Ajayan Sritharan
Investor Relations Manager
Real Experts Inc
www.RealExpertsInc.com
Thomas,
I have a couple of follow-up questions based on the premise that "cashflow on newly acquired properties is typically low".
1. How do you position a real estate deal to a potential JV partner when housing prices are expected to remain flat or depreciate over the next 12-18 months? There won't be a significant return from cashflow until rents increase (or you decrease expenses), or a paper equity gain for several years out.
2. How do directed real estate RRSP investments work? I understand that you need to pay a reasonable annual return (5-10%) to your investor. Where does that cash come from? You could ask for more money than you need and pay them back their own money, but you will probably run out before you cashflow catches up.
Hi Sean:
The way we position deals were current cash flow is low is as follows. Our strategy is to allows buy properties significantly aprraised market value (at least 5-10%). Therefore, the JV partners are profiting from their investment from day one - given the built in equity the all of our deals offer.
Therefore, even if the cash flow is relatively low, the Return on Investment to the investors is still attractive.
The challenge may be to find deals that meet this criteria. Through constant research and expert negotiation, we have been able to secure such deals in Alberta Top 10 Towns.
The other item that we highligh is that investors will generate returns from the mortgage principal paydown that happens every month/year.
Hope this helps.
Ajayan Sritharan
Investor Relations Manager
Real Experts Inc
www.RealExpertsInc.com
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I have a newbie question.
I`ve done a fair bit of reading and recently purchased my first investment property, using a Rent to Own strategy. It worked out well, I`m cash flowing...and filled the place after only 5 days.
With current interest rates the way they are, and after determining where to next invest (thanks "Top 10 cities"...) I can`t help but think I should try a Buy and Hold strategy with my next investment. (love that " Don`t wait to invest in real estate - Invest in real estate and wait ! ™" mantra...)
The only fly in the ointment is that I don`t have any cash to invest with. I do have well over 90% equity in my home (well a little less thanks to that first property). I get that Cash Flow is King, but if I use my HELOC to put a downpayment on a home (and be 100%) leveraged, my cash flow isn`t as high as one would like. (paying interest for both the investment property AND my HELOC.) However, I do believe that now`s the time to buy and I don`t want to wait to save up the cash...Is non-negative (small) cash flow ok under the circumstances, given mortgage paydown and income tax advantages - as long as I buy and hold long enough? I figure with a good 5 year rate and steady paydown with the little cash flow I have, I`ll be in much better shape after 5 years.)
Any thoughts oh wise ones
???
I`ve done a fair bit of reading and recently purchased my first investment property, using a Rent to Own strategy. It worked out well, I`m cash flowing...and filled the place after only 5 days.
With current interest rates the way they are, and after determining where to next invest (thanks "Top 10 cities"...) I can`t help but think I should try a Buy and Hold strategy with my next investment. (love that " Don`t wait to invest in real estate - Invest in real estate and wait ! ™" mantra...)
The only fly in the ointment is that I don`t have any cash to invest with. I do have well over 90% equity in my home (well a little less thanks to that first property). I get that Cash Flow is King, but if I use my HELOC to put a downpayment on a home (and be 100%) leveraged, my cash flow isn`t as high as one would like. (paying interest for both the investment property AND my HELOC.) However, I do believe that now`s the time to buy and I don`t want to wait to save up the cash...Is non-negative (small) cash flow ok under the circumstances, given mortgage paydown and income tax advantages - as long as I buy and hold long enough? I figure with a good 5 year rate and steady paydown with the little cash flow I have, I`ll be in much better shape after 5 years.)
Any thoughts oh wise ones
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QUOTE (mplut @ May 22 2009, 06:33 PM)
... I get that Cash Flow is King, but...
Actually, Cash is King - Cash Flow is Queen ` !!
Thus: aim to raise cash through JVs from money partners !
... I get that Cash Flow is King, but...
Actually, Cash is King - Cash Flow is Queen ` !!
Thus: aim to raise cash through JVs from money partners !
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QUOTE (mplut @ May 22 2009, 08:33 PM) I do have well over 90% equity in my home (well a little less thanks to that first property). I get that Cash Flow is King, but if I use my HELOC to put a downpayment on a home (and be 100%) leveraged
Having your primary residence completely paid for without any debt registered against it is the goal of many people and I respect this objective.
Many Investors, me included, would see this equity as an opportunity to improve their net worth and to reach goals that are even more important to them. The key is to make sure all your financial objectives are being met, including cash reserves and cash flow (with the HELCO included), do not waive on these requirements. There are many investment opportunities out there that will allow you to hit these targets. This is how I started building my personal portfolio and I know many other REIN members that are successfully using this approach.
Financial instruments such as the Matrix Mortgage were designed specifically for this type of strategy.
Having your primary residence completely paid for without any debt registered against it is the goal of many people and I respect this objective.
Many Investors, me included, would see this equity as an opportunity to improve their net worth and to reach goals that are even more important to them. The key is to make sure all your financial objectives are being met, including cash reserves and cash flow (with the HELCO included), do not waive on these requirements. There are many investment opportunities out there that will allow you to hit these targets. This is how I started building my personal portfolio and I know many other REIN members that are successfully using this approach.
Financial instruments such as the Matrix Mortgage were designed specifically for this type of strategy.
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The only fly in the ointment is that I don`t have any cash to invest with. I do have well over 90% equity in my home (well a little less thanks to that first property). I get that Cash Flow is King, but if I use my HELOC to put a down payment on a home (and be 100%) leveraged, my cash flow isn`t as high as one would like. (paying interest for both the investment property AND my HELOC.) However, I do believe that now is the time to buy and I don`t want to wait to save up the cash...Is non-negative (small) cash flow OK under the circumstances, given mortgage pay down and income tax advantages - as long as I buy and hold long enough? I figure with a good 5 year rate and steady pay down with the little cash flow I have, I`ll be in much better shape after 5 years.)
Any thoughts oh wise ones
In my personal opinion this is a formula for disaster. Especially if you are just starting out. Although I personally have no problem with 100% leveraging, and presently do it, I would never do it on a property without adequate cash flow. I have a set minimum amount of cash flow and make every effort to meet or exceed that number.
My target is $100/door positive cash flow from day one based on 100% financing.
If your cash flow is small or non existent you will end up negative at some point and start to dig a pit you will not get out of.
Regardless of your financing you still should protect yourself with adequate cash flow.
Unless of course you are already stinking rich.
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QUOTE (invst4profit @ May 23 2009, 06:40 PM)
If your cash flow is small or non existent you will end up negative at some point and start to dig a pit you will not get out of.
Regardless of your financing you still should protect yourself with adequate cash flow.
Greg why are you making this assumption?
I invest in the same areas that Kevin does following strategies taught by REIN.
I can appreciate your concern that others do not jump on the bandwagon and purchase on value speculation just appreciate that most of us learn to calculate cashflow as part of the system.
BTW we are getting great cashflow in Hamilton right now but we are not buying anything and everything, each property I analyze goes through a filtering system designed for that specific property type and location.
If your cash flow is small or non existent you will end up negative at some point and start to dig a pit you will not get out of.
Regardless of your financing you still should protect yourself with adequate cash flow.
Greg why are you making this assumption?
I invest in the same areas that Kevin does following strategies taught by REIN.
I can appreciate your concern that others do not jump on the bandwagon and purchase on value speculation just appreciate that most of us learn to calculate cashflow as part of the system.
BTW we are getting great cashflow in Hamilton right now but we are not buying anything and everything, each property I analyze goes through a filtering system designed for that specific property type and location.
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Thanks for the replies. I guess I wasn`t sure what was considered "adequate cash flow". $100 with 100% financing was one figure - that`s kind of what I had classed as "non-negative"....
I haven`t signed on for the Rein system yet and I guess that`s where I show my ignorance. It`s interesting that there were such diverse responses from the same group!
I do feel very strongly that the equity in my home can be used to get started and I`m glad to hear that it can be a reasonable strategy AS LONG as one does not waive on positive cash flow and adequate reserves... (no I`m not stinking rich - I haven`t invested much in Real Estate yet
)
Now all I have to do is make sure I find the right property.
Thanks again!
I haven`t signed on for the Rein system yet and I guess that`s where I show my ignorance. It`s interesting that there were such diverse responses from the same group!
I do feel very strongly that the equity in my home can be used to get started and I`m glad to hear that it can be a reasonable strategy AS LONG as one does not waive on positive cash flow and adequate reserves... (no I`m not stinking rich - I haven`t invested much in Real Estate yet
Now all I have to do is make sure I find the right property.
Thanks again!
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QUOTE (mplut @ May 24 2009, 08:55 AM) ..
Now all I have to do is make sure I find the right property ...
not quite .. then you have to find the cash and the mortgage, and then you have to manage it impeccably for perhaps 5 years or longer (which may require a large reserve and expertise or a 3rd party as it is an ongoing, monthly issue !!) and perhaps upgrade required elements like roofs, bathrooms, kitchens, fences ...
finding the right deal is only about 10% of the work ..
hanging in there is the other 90% .. hanging in financially and hanging in emotionally !
Now all I have to do is make sure I find the right property ...
not quite .. then you have to find the cash and the mortgage, and then you have to manage it impeccably for perhaps 5 years or longer (which may require a large reserve and expertise or a 3rd party as it is an ongoing, monthly issue !!) and perhaps upgrade required elements like roofs, bathrooms, kitchens, fences ...
finding the right deal is only about 10% of the work ..
hanging in there is the other 90% .. hanging in financially and hanging in emotionally !