How to make monthly INCOME

[JoefromTO]

QUOTE (ruddens @ Jan 6 2009, 12:45 PM) Hi,

I`m just building an investment plan, and my wish is to eventually invest in real estate on a full time basis. However, as I`m developing my plan, I just don`t see how real estate brings money in my pocket to pay my personal bills, groceries, and normal life expenses. It seems I can only make money with equity and when selling after a few years. Even when using OPM, spliting profit with other investors, there`s almost nothing left to survive on...! Until it`s sold...

Is that all there is to it? How do people make a living out of real estate if it doesn`t bring regular income?

Thanks

Ruddens

Not necessarily...As you pay off your debt with every mortgage payment, your equity does increase...provided the values dont change in the wrong direction...but overtime (years) values do go up, speaking statistically. But something else to keep in mind, as you pay down your debt, when it comes time to renew your mortgage which may be 5 years down the road, you will be negotiating with a lower debt amount and can possibly see a lower monthly payment, provided interest rates dont climb to high...so if the cashflow is what your looking for and your willing to wait a few years to see it improve, then pay down as much of the debt with positive cashflow and increase your rents every year, then you should see some decent cashflow down the road.

But this has alot to do with how much your LTV is, what your cashflow is like when you started, how much of that cash you put back to the mortgage and what the interest rates are like when you go to renew...if you planned well, youll start to see some appreciable cashflow down the road. Think long term...

 

[mplut]

QUOTE (thomasbeyer2000 @ May 24 2009, 08:17 PM) 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 !


Financing is covered, and I have no delusions about the the work involved (I`m tough

) or the fact that it`s no get rich quick scheme. I was more thinking in terms of having the potential to generate cash flow.

But thanks for the warning !

 

[Thomas Beyer]

QUOTE (mplut @ May 26 2009, 12:09 PM)
Financing is covered, and I have no delusions about the the work involved (I'm tough

) or the fact that it's no get rich quick scheme. I was more thinking in terms of having the potential to generate cash flow.



But thanks for the warning !


cash-flow is a function of LEVERAGE .. the less levered the more cash-flow but the less the overall ROI in a rising market !



Thus, decide: do you wish:



cash-flow and equity growth ?



or



cash-flow and equity growth ?



some metrics on ROIs here:





Equity Gain not the only way to make money in RE: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html

 

[invst4profit]

QUOTE ( @ May 23 2009, 10:27 PM) 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 cash flow as part of the system.
BTW we are getting great cash flow 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.

The reason I believe one will go negative with next to no positive cash flow is because every property eventually has unexpected major expenses. These may be a new roof, furnace, eviction, extended vacancy or simply a deductible on a insurance claim. Having small positive cash flow means it will be a very long time to recoup the loss and likely in the meantime another will come along.

As an example a property with say $50/month positive cash flow will take 70 months to pay back a $3500 furnace or 70 months to save up a reserve fund to cover a future cost.
Profits are easily wiped out when dealing with a single property which is why I advise new investors to be vary careful in choosing and financing there first few properties.

As far as following the REIN system is concerned it is good but I have seen many examples of REIN members selling "positive cash flow" properties on this site that are very risky investments in my opinion. I therefor do not assume everyone is on the same page.

 

[housingrental]

This is an awesome post and I agree entirely !
Re selling stuff on site.. absolutely,there was an even a recent one with a stated 4 9% cap that had positive cash flow!

Also when looking at investments you should ask some of the similiar what if questions you would if buying any business on the assumptions of expense and revenue stability...
What happens when interest rates are renewed and at 7% for an investment property not <4% ?
What happens when rental rates decrease by 10% in your market?
A good starting point in property valuation for me is at minimum 7% true cap rate after some value has been added... and haven`t seen something at that low of cap worth the risk... and by true cap expenses that include pro-rated portions of all capital expenditures and periodic aesthetic upgrades.

Another questions to use is if I sell this property in ten years from now and deduct transaction costs how much of a premium on return will it have generated compared to other investment options assuming no change in property valuation?

QUOTE (invst4profit @ May 26 2009, 03:26 PM) The reason I believe one will go negative with next to no positive cash flow is because every property eventually has unexpected major expenses. These may be a new roof, furnace, eviction, extended vacancy or simply a deductible on a insurance claim. Having small positive cash flow means it will be a very long time to recoup the loss and likely in the meantime another will come along.

As an example a property with say $50/month positive cash flow will take 70 months to pay back a $3500 furnace or 70 months to save up a reserve fund to cover a future cost.
Profits are easily wiped out when dealing with a single property which is why I advise new investors to be vary careful in choosing and financing there first few properties.

As far as following the REIN system is concerned it is good but I have seen many examples of REIN members selling "positive cash flow" properties on this site that are very risky investments in my opinion. I therefor do not assume everyone is on the same page.

 

[freemanyee]

You can invest in mortgages for higher income...but no upside.

 

[JoefromTO]

QUOTE (thomasbeyer2000 @ May 26 2009, 02:18 PM)
cash-flow is a function of LEVERAGE .. the less levered the more cash-flow but the less the overall ROI in a rising market !



Thus, decide: do you wish:



cash-flow and equity growth ?



or



cash-flow and equity growth ?



some metrics on ROIs here:





Equity Gain not the only way to make money in RE: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html






That's a great way to put it lol...very simple and precise.

 

[EdRenkema]

QUOTE (invst4profit @ May 26 2009, 01:26 PM) The reason I believe one will go negative with next to no positive cash flow is because every property eventually has unexpected major expenses. These may be a new roof, furnace, eviction, extended vacancy or simply a deductible on a insurance claim. Having small positive cash flow means it will be a very long time to recoup the loss and likely in the meantime another will come along.As far as unexpected expenses that is why each property has a staying power fund.
Your concerns are warranted its just I see you painting the entire system with the same brush. I was the same way till I joined REIN and found the people who helped me find the right deals. By that I mean with positive cash flow in strong growth areas. By the same token through contacts at REIN I`m able to network to competent trades and subcontractors.
That doesn`t mean everyone in the network is impeccably competent and ethical which is why some of them may be unloading those questionable properties.

At the end of the day we are each responsible for our own actions.

 

[invst4profit]

We have wandered off of the OP question regarding whether he should do 100% financing on a property with only a small cash flow.
The direction of my response was to point out that there would, at times, be negative cash flow and that without other properties with positive cash flow or a reserve fund (which I assumed he would not have) to support those time he would continue to dig a deeper negative hole.

My analysis indicated he has not in fact following the advice of the REIN system.

 

[mplut]

Hey there,
Thanks Greg for making sure we/I stay on my toes. Having said that I must say that I`m still confused. I`m not sure if I should be posting at this point because it is a forum "for sophisticated investors" and I fall off the list at the second word.

. Having said that my simple question has certainly spawned some varied and interesting responses so it can`t all be bad.

I`m certainly not claiming that I follow the REIN system since I`m not yet a member, and at this point am reading some books from the REIN library. (cautiously evaluating different systems at this point.) I do know my limitations and am just testing the water with my toes.

I will say that I was under the impression that by following the right system I could do ok in real estate at this point in my life. I was a little taken aback by the words "recipe for disaster" - hardly the words I would ever have thought to describe my rather conservative approach to everything I do. But if it IS a recipe for disaster I may as well know now.

I do concern myself very much about cash flow because I`ve heard over and over again why it is important. But the reality is, cash flow is smaller if you are 100% leveraged. Is it always TOO small?

As a side note my nice home is just about paid off, my husband I both earn excellent incomes, and manage our personal finances well. We have no other debts.

Long story short I guess I should have started with a different question - Should I stand back and watch until I have saved up some actual cash money or can I take advantage of the times and the large amount of equity in my home and start improving my net worth now?

I don`t think I have the personality or comfort level to seek partnering with others at this time. I am interested in Cash Flow not to live from but as a safety measure. Equity Growth is my ultimate focus.

Thanks to everyone who took the time to post a response to my question. It is very much appreciated.

Margaret

 

[JoefromTO]

QUOTE (mplut @ May 27 2009, 11:49 AM)
Hey there,



Thanks Greg for making sure we/I stay on my toes. Having said that I must say that I'm still confused. I'm not sure if I should be posting at this point because it is a forum "for sophisticated investors" and I fall off the list at the second word.

. Having said that my simple question has certainly spawned some varied and interesting responses so it can't all be bad.



I'm certainly not claiming that I follow the REIN system since I'm not yet a member, and at this point am reading some books from the REIN library. (cautiously evaluating different systems at this point.) I do know my limitations and am just testing the water with my toes.



I will say that I was under the impression that by following the right system I could do ok in real estate at this point in my life. I was a little taken aback by the words "recipe for disaster" - hardly the words I would ever have thought to describe my rather conservative approach to everything I do. But if it IS a recipe for disaster I may as well know now.



I do concern myself very much about cash flow because I've heard over and over again why it is important. But the reality is, cash flow is smaller if you are 100% leveraged. Is it always TOO small?



As a side note my nice home is just about paid off, my husband I both earn excellent incomes, and manage our personal finances well. We have no other debts.



Long story short I guess I should have started with a different question - Should I stand back and watch until I have saved up some actual cash money or can I take advantage of the times and the large amount of equity in my home and start improving my net worth now?



I don't think I have the personality or comfort level to seek partnering with others at this time. I am interested in Cash Flow not to live from but as a safety measure. Equity Growth is my ultimate focus.



Thanks to everyone who took the time to post a response to my question. It is very much appreciated.



Margaret




I too chose not to partner with anyone. Joint ventures are definitely an option, but not for me at this time. So your not alone on that aspect.



As for Cashflow...if you want that right off the bat, then you need to make a substantial down payment to minimize the monthly dues, to increase the cashflow BUT depending on how much of your own cash you put down (note--I'm not refering to equity--I'm talking about actual cash), and let's say you put down 50%...then your ability to purchase multiple properties is limited. But this is how you would "help" guarantee positive cashflow.



But even if you did that you still have to consider how much you paid for the property and what you could actually rent it for. This is where the 10% rule comes in...to put it simple, if you paid $200,000.00 for a property, you should expect close to $20,000.00 gross rent per year. But the math doesn't stop there...you have to factor in all of your real expenses and factor in others like 5% vacancy/year and 5% repairs and maintenance per year...all against the gross rent...and then as Thomas always says, you have to see what the mortgage payment could be like say 5 years down the road when interest rates are expect to climb to 6,7, 8 % or more...who knows?



So the only way to really know if the place with cashflow, is to factore everything in...and even if you had paid for that $200,000.00 property in full...thereby no mortgage...you would have removed that 1 variable from affecting the cashflow, but not everything.



Besides, that 1 property, if paid in full, isn't bringing in $20,000.00/ year net...its more like $10,000.00(conservatively speaking).



What everyone is saying though...is that since the cashflow really isn't that great when you first purchase a property and only put the minimum down (say 25%), your really not buying for cashflow, your buying for the equity appreciation..and THATS where the real ROI comes into play.



Either way, you will have to wait years for the equity to appreciate to the point where its worth selling...might as well use OPM (other peoples money) in the meantime...



If you can purchase 1 property/ year and forget the cashflow(meaning ensuring it has positive cashflow and all debt is serviced, but not something you get rich off of), in 10 years you will own 10 properties, all should have appreciated and all would have seen rent increases(provided you actually increase your rents each year). In ten years, 5 of those properties would have quit a bit of the debt paid off as well and the cashflow starts to shine...in 15 years, all 10 properties are cashflowing very nicely and all properties are probably worth alot more than you paid...



In the end, you would have many more properties than if you paid the place off in full with your own money back when you first started...unless you make a crap load of money each year

 

[invst4profit]

Although in theory that all sounds good working as hard as one often has to with no significant cash flow can be very frustrating. Having to find the time and extra money during rough times can create sleepless nights. Keep in mind that to some degree you are speculating and not strictly investing although your risk is low.
There are plenty of properties that do cash flow adequately even with 100% financing so keep looking until you find it.

Also one must keep in mind that putting in a down payment. paying down a mortgage or even paying 100% cash does not change the quality of a deal.
The income off of any investment property is arrived from two sources. part is the income from the property itself the other is the return on your cash.
You can not force cash flow from a property by throwing cash at it except by placing no actual value on that cash(equity).

 

[EdRenkema]

QUOTE (invst4profit @ May 27 2009, 11:44 AM) There are plenty of properties that do cash flow adequately even with 100% financing so keep looking until you find it.
Good point, I`ve found a few of those but it wasn`t easy until I started meeting the right people who cut quickly to the properties that work.

Quick story, a RE agent who helped my buy my principal residence had 2 rentals that he was selling, I analyzed them and found they would negative cashflow $200 monthly so no for me. He rationalized that they were good properties for him since he had a high income and they were a tax deduction against his income while he enjoyed the appreciation.
I did not use him to purchase rental properties since he does not understand cashflow,
what goes on in someone`s head to make them think losing money is a good thing?

I currently use a RE agent to buy rental properties who owns some in the same area I invest and who understands cashflow and who understands my agenda, less time wasted.

 

[Denun]

QUOTE (thomasbeyer2000 @ Jan 6 2009, 10:04 AM) .. some REIN members have done it in 1-2 years .. many in 4-6 years .. all VERY DOABLE if you follow a system such as the one REIN teaches !


Hi

where i can find that system? can you provide a link pls directly to the book/product to buy?

 

[JoeRagona]

QUOTE (Denun @ Jun 17 2010, 11:56 AM) Hi

where i can find that system? can you provide a link pls directly to the book/product to buy?


Start with this page here. http://www.realestateinvestingincanada.com...CookieSupport=1

Great speed forward!!!