WHY AREN'T YOU CASH FLOWING?

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

Remember: Please share this article if it helped

Moving from a 'mom and pop' mindset to an investor mindset

If your day job is paying in any way for your properties after the initial down payment, you are doing something wrong... and very dangerous. You are putting your family at risk. I have discussed this in previous posts, but for today I would like to take a look at 4 reasons the average buy and hold investor is not cash flowing.

1. Your purchase price was too high

Always remember that if you pay more money for a property, it doesn't necessarily mean you will make more from that property in rent. I talk to relatives who consistently purchase expensive properties, don't make a lot from rent, and then complain about the market or properties in general. Here is a quick understanding of how I think about the purchase price of a property vs. the rent. While the purchase price of a property can very widely, rents typically do not in any market. I'll give you an example. In my city of Calgary a purchase price for a single family detached home can range from about 250k to 10 million dollars. Rent, however, hits a low around $700/month and a high of around $5,000/month (furnished). There are vacation rentals as well, but for our purpose today these numbers will suffice.

If you purchase a property for 300k, suite it, and then rent out both top and bottom for around 2,800 total, you will most likely cash flow. If you purchase a 'nicer' property for 500k, suite it, and then rent out both top and bottom for around 3,500, you will probably not cash flow (after all expenses). Always keep both your potential rental income as well as all of your expenses in mind before purchasing a property. Some areas rent for more than others, but generally speaking it is best to purchase smaller and less expensive properties and enjoy the fact that there is a basement to rental prices and that you will not make less than the low everywhere else.

For more on this it is good to learn about and run a quick "Rent to Value" ratio. This is equivalent to the 'earnings-price ratio' of publicly traded companies. You add up ho much rent you make in a year, and divide by the purchase price of the property (or property value if you already own it). This number should give you a basis from which you can quickly see where value is in the buy and hold market.

2. Lack of equity in your property

If you debt ratio is too high, you will also be in danger of going cash flow negative. Maybe you purchased a property at a great deal and own it for 20 years, but now you pull out as much equity as possible for other purchases or investments and you no longer cash flow. Keep in mind that if you are wanting to purchase properties with 20% down payments, you may be tight or not cash flow at all. This is where you will need to purchase a less expensive house (get a good deal by speaking to a wholesaler in your neighborhood). If, however, you refinance you may want to be careful about how much you pull out of the property. Is it ok to sit with 35% equity as long as everything is cash flowing? Absolutely!

3. Your turnover is too high

If you charge the absolute highest possible rent or don't take care of your tenants (slumlords), you may have a high turnover rate. This can often kill cash flow because each time tenants turn over you have to clean the property, fix at least something even if it's just holes in the wall, or redo flooring and paint. Unless your tenants are consistently ideal or you are doing all this work yourself (not ideal), these costs will add up and crush your cash flow. Another expense when rehabbing your property is that it may sit empty for a month. Now, there are ways around all these problems, but this is what I see from investors who don't understand how to make their money work for them.

My hint: Always take care of your tenants and it can often pay quite a lot to have one family stay in a property for 3-5 years even if you make $50 less in rent each month. Something to think about.

4. You may be spending too much or too little on maintenance

There is a balance to wise maintenance of a property. If you always wait for something to go wrong or break you will be paying professionals to fix these problems and it will be more expensive than regular cleaning and maintenance of your property. Even worse, you may have one problem that goes unnoticed, life a roof problem, that leads to massive problems, like an unnoticed leak for 3 months.

On the other hand, if you always only install marble counter tops and hardwood flooring in your properties, you will eventually have big maintenance costs because tenants typically don't treat your property as well as you would yourself (unless you are a slumlord... I hate slumlords!).

Summary

I will keep this summary VERY short. If you aren't cash flowing it means YOU are doing something wrong. Please don't blame others or real estate investing in general... simply change what you need to in order to cash flow. These are simple fixes. If you want more information join an investing club in your city or community and ask questions. You will be surprised how many people are willing to give you really great advice and tips when it comes to planning your retirement through investing in real estate.



Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html