Cash flow is the net result of subtracting all cash out flow from all cash coming in. Quoting the book from Scott McGillivray and Michael Sarracini, Cash Flow for Life “This has nothing to do with taxes or deducibility; its straight cash. Subtracting every dollar out-of-pocket from every dollar coming in on a property will give you your cash flow number.”
“Would you put your money in a bank savings account that required you to pay them every month to hold it? Buying zero or negative cash flow hoping to cash in on appreciation is just not smart. Appreciation is probable, but can’t be predictable”.
In fall 2013, a new triplex listing came on the market in Oshawa. The building was in pretty decent shape, was well maintained, and obviously had tenants who cared for the building and their individual units. The asking price was actually a little lower than the selling price of a similar triplex one block over that was in similar shape. It sold earlier this year.
The thing is, each of the three tenants had been in the building for a minimum of 17 years, with one tenant living there for close to 40 years. To make matters worse, the previous landlords were not diligent in raising the rents each year. As a result, despite an asking price of $495000, the landlord was receiving just $2350 a month in rent INCLUDING utility expenses. This was an example of a negative cash flow property.
The clients I was with and I joked about trying to bring in relatives to move in. This is really about the only way you can legally evict long term tenants in Ontario. I had even said you could bring in family to live for free for one year and STILL be better off long term for this property. Meanwhile, as our showing was during an open house for the building, another potential buyer spoke up and said he felt that the security of a good quality tenant was worth more than a couple hundred dollars a month and wouldn’t even think about getting rid of the tenants.
It wasn’t worth my efforts to explain to him how wrong he was. He believes that it is worth about $500K now and in ten years it will be worth $700K. It is worth it for him to use his HELOC to buy this property and lose money for a decade in the hope of generating increased values in the future.
As a sophisticated, knowledgeable investor, you have to not get caught up in the frenzy. Make sound choices and move on from there. If there are no cash flow generating properties in your market (doubtful, but possible) then look to another market that interests you.
So, when evaluating a property, but sure to use an Analyzer like the one on my website. Then punch in realistic numbers for revenue and expenses. But also sure to include ALL of the expenses. If there is money left at the end, that my friends is positive cash flow.
In the photo gallery, there is an ice cream cake with a message on a top corner that says “May all your cash flows be positive”. Words to live by.