Profit Center 1: Cash Flow

Profit Center 1: Cash Flow

As you have heard me say before, there are 7 different ways to profit from a single rental property. Most people know about 1-2, but do you know all 7 and are you taking advantage of them? This post will quickly explain the number 1 and by far the most important profit center in all of real estate: CASH FLOW.

This is a hotly debated topic in real estate world…or at least it was over the years. Lately though, more and more investors are agreeing that cash flow is king when it comes to rental properties. First, what is cash flow?

Cash flow is the money that is left over every month after ALL expenses are paid, including the vacancy and maintenance allowances, which are often left off of income and expense reports. Cash flow is money you get to spend on whatever you want. It is (hopefully) steady income that is produced each month from the carefully selected and well managed rental property.

Basic Example:

Income: $2000/month for renting a single family home

Expenses: property taxes ($200/month) + utilities ($200/month avg) + vacancy allowance ($167/month avg) + maintenance allowance ($167/month avg) + mortgage ($1000/month) + insurance ($70/month) = $1804/month.

Cash Flow = Income ($2000) – Expenses ($1804) = $196 of Cash Flow

That is a fairly average monthly cash flow for a self managed single family home. If you are not willing to manage the property yourself, a property management company will charge 5-10% of the monthly rent and that will be the end of the cash flow in this example. If the property is self managed, $196 is a safe amount of left over money (for a single family home) that also allows for some minor unpredictable expenses to pop up over the year without having the bank repossess the property. Larger properties with more units will require a larger cash flow in order to feel comfortable sleeping at night.

This is why cash is king. Investors at one time would buy properties with great anticipation that the market was going to heat up, or they heard the surrounding land was going to develop and increase property values all around. They would sell during the high and make a big profit. It worked for some people, but it failed for more people because each month they are LOSING money since the expenses are higher than the income. Also, what if the area doesn’t develop as expected? What if the market turns at the wrong time? There are so many variables in play. It is extremely dangerous to invest in rental properties, knowingly losing money every single month, with the goal to make money during the peak of the cycle….IF the property successfully sells. If one is able to accurately predict those events and have all the ducks align nicely in a row, they should play the stock market. I invest in rental properties because of the security and immediate cash, not on speculation of future gains.

Smart investors can make much more money over time by carefully selecting a property that will cash flow each month. They will use those profits and re-invest them back into the property, which increases the value of the property, or buy more properties. Obviously, it’s very difficult to grow a portfolio when cash flow is negative.

Takeaway – I will never buy a rental property that does not cash flow from month one. It’s simply not worth the risk and does not make any business sense.

Keep an eye out for future posts that go into more detail on how to improve and maximize cash flow on rental properties.

Also, please send me your comments or stories regarding cash flow. I read all of them and I may also feature your success story in future posts.

Mark

 

 

Get Paid Every Month

Get Paid Every Month

There are many reasons why I believe real estate is one of the best investments on the planet. How many types of investments can be made that allow profits to be earned in the first month and every month after? Profits paid out after all expenses are covered? I’m sure there are a few, but not many. In this post, I will compare of few of the more popular investment choices that are made by the masses.

RE vs paper (stocks, bonds, mutual funds etc)

When you buy a stock or mutual fund, you are betting that the value of that investment will increase. Money is not truly made until the investment is cashed out. There are dividends that may or may not be earned, and if you’re lucky, those can be payed out regularly, but it’s certainly not common. What is much more common is regular, consistent monthly payouts from a properly purchased and managed rental property. This is money that is deposited into your bank account each month after all expenses are paid off. This is money that can be spent on whatever you wish.

RE vs traditional business

This is not a difficult comparison. Most traditional businesses fail. I’m not talking about $0 monthly cash flow…I mean completely fail. If a traditional business owner is lucky, it is still extremely rare to boast profits after the first month. Things to consider: franchise fee, business license, equipment, property costs, maintenance, payroll, utilities, taxes, marketing, opening store orders etc etc. Compare this to buying a fully tenanted apartment building, have them pay all the expenses that come with that building and the balance going into your bank account….30 days after buying the building.

RE vs unique products/wholesaling 

There are a lot of successful people who are developing or wholesaling products. Amazon has made this easier to do than every before. No one needs a garage to store inventory anymore. Profits can be made after 1 month, but it’s not common. Out of all my friends who I know well and keep in touch, I know one (1) person who wholesales or invents products on a regular basis. So this type of investment or business model is either not as easy as IG and FB make it seem (most likely), or not many people know of this business model yet. If you ask most people about rental properties, they understand that the tenants pay the bills and there’s some left over each month for the owner(s). Far more people understand the concept of rental properties. What is not well understood is how to acquire those properties, and that is the knowledge gap I bridge.

Takeaway: Cash in hand is one of the many reasons why I believe real estate is one of the best investment vehicles available to average people. If done correctly, there are 7 ways to earn profits on a single property and one of those profit centers is earning monthly income after all expenses are paid. This is defined as “Cash Flow”. There will be a future post on cash flow that will break down exactly how money is earned each month from a rental property, but I just wanted to first give a short intro on the concept.

If you have questions or comments about this post, please reach out to me at mark@perryinvestments.ca and start the conversation.

Cheers!

Mark

How To Leverage Your Money

How To Leverage Your Money

Most people have experienced the concept of leveraging their money in real estate when they purchased their first home, but few realize the true power of leverage when it comes to investing in real estate.

There is a very old debate about a home being an asset or a liability. Since a home doesn’t pay out money each month, most (should) consider it a liability since it actually costs money out of pocket to operate each month. Therefore, leveraging money to buy a personal home is not usually a great idea, but also not easy for most people to avoid.

I won’t break down the specific numbers in this particular post, but I can show you how much more lucrative it is to purchase 5 properties at 20% down rather than buy 1 property in cash. When you calculate all 7 profit centers (upcoming post) from each property, 5 leveraged properties can make a LOT more money than 1 property that was bought in cash.

Basic example:

Purchase price of rental property – $100,000 (not in Canada!)

Down payment required – $20,000 (can be less in some cases)

Bank or private loan for the balance – $80,000 plus interest.

This means 80% of the property can be leveraged by getting a mortgage from the bank or a private loan. If you want to buy 100K worth of stocks, you need to invest 100K worth of your money. The last time I checked, the banks do not give out loans to invest in the stock market.

So once the rental property is leveraged, now what? Each month, the bank or lender requires payments to pay back the loan plus interest. No problem. The tenants who are renting the property make monthly rent payments, and that money is used to pay down all expenses and hopefully puts a little extra in the pocket each month. What happens if the tenant moves out or stops paying rent? Browse my website to learn what we are doing with multi-family properties and how these challenges are overcome to continue earning profits.

In summary, once you learn the true power of leverage and how to use it to your advantage in purchasing real estate, the sky is the limit….until they start building on Mars.

Teamwork makes the dream work.

Mark

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Mark Perry

Professional Real Estate Investor

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