How to Finance & Build 10K/month Cash Flow from Rentals!

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How to Finance & Build 10K/month Cash Flow from Rentals!

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4 things to avoid when buying cash flow real estate

Buying cash flow real estate to hold is one of the best strategies in many areas in today’s market. However, there are many challenges and mistakes that can be made especially with beginners. Here are 4 things to avoid when buying cash flow real estate.

  1. Leave out management, vacancy and maintenance in calculating cash flow – I see it all the time. Rent – PITI is used to calculate positive cash flow. If you do not have room for at least 10% property management, 10% vacancy and 10% maintenance then you could end up losing money over time. It is much more accurate to take 70% of Rent – PITI to calculate positive cash flow.
  2. Owner manage and/or get crummy managers – Many do it yourselfers choose to manage properties themselves and they have no idea what they are doing. Tenants walk all over them, do not pay rent, trash the place and it can all be avoided by obtaining good property managers. Do not be afraid to pay your managers well, they will allow you to sit back and generate passive income and look for more profitable deals.
  3. Too many upgrades – Do not over do it with upgrades for rentals. You are not living in the home or flipping the home. Only do upgrades that will increase rent, get tenants faster and stay longer or prevent more costly upgrades. I see it all the time though when people say “I just wanted to make the upgrade so I don’t have to worry about it”. Well, they just threw money down the toilet. Do those upgrades right before you sell, not before you rent.
  4. Buy something they would live in or right near their home – This one is awesome. I have friends call me all the time and say “There is a foreclosure right down the street that would be an awesome rental”. I try not to laugh and ask them about the property, rent and details. Usually the numbers are terrible for rentals but most people are more comfortable investing in their neighborhood so I understand why they do it. But I do not agree with it. Buy a cash flow deal because the numbers make sense and you have multiple exit strategies, not because you are comfortable and do not involve emotions. If you say you like it, you better be talking about the numbers and exits.
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16 Responses to 4 things to avoid when buying cash flow real estate

  1. I hear you on the first point Ryan; absolutely you need to allow 10% for maintenance/repairs – I’ve never found it to be less than that. Even if people have a fairly low maintenance building, when tenants leave, just one unit rehab can blow away a landlord’s maintenance budget for the whole year, especially on buildings less than five units.

    This is not an easy business, but if you have the right systems in place you can avoid many nasty issues!

    Thanks Ryan……

  2. Excellent tips! This is a business decision. The numbers must make sense. Absolutely hire a property manager. I would suggest staying away from carpet. Try tile or pergo. Lasts longer, easier to clean.

    Thank you!

  3. Joe Fleischaker says:

    Great info Ryan.

  4. Bill Farrell says:

    Ryan – This all makes sense. What you are really saying is that this is a business. Treat it as a business.

    1. Don’t overpay – you wouldn’t buy any business on a multiple of revenues only. all businesses have costs, look at cash flow (EBIT or EBITDA). Expenses at only 20% of revenues (with revenues being after the deduct for vacancies) but debt service is a big part of business so you probably shouldn’t use EBIT but rather EBT.

    2. Manage the business properly, like any other business. Good management costs money, but bad management costs much more money.

    3. Enhance your product to a) maintain current sales (in light of new competition or declining sales – occupancy in this case – due to inadequate quality), b) enhance sales (increase rents, get more stable tenants), c) lower costs (energy star appliances if you pay electricity, fix minor problems before they become major, fix anything that could lead to a law suit such as broken railings), not for any other reason.

    4. Always make it a business decision not a personal decision.

  5. Bakul Haria says:

    You could not get it better than this.

  6. Jules Greenblatt says:

    Well put! I’ve seen would be investors make these same bad assumptions time and again.

  7. manoj chawla says:

    I agree with everything but I would suggest

    1. look at the neighbourhood. if too many units belong to people looking to rent then it can create a risk that too many units may come on the Market causing pressure on rental rates.

    2. check out what kind of planning permits have been issued. will this cause construction blight and subsequently cause additional units to come online which could put pressure on rents.

    manoj

  8. Ryan Moeller says:

    Thanks for the comment Manoj, great additions!!

  9. Ryan Moeller says:

    Hey Jules, they will either learn or will not be investing in RE long. Thanks for the comment!!

  10. Ryan Moeller says:

    Great comments Bill, I totally agree. It is all business so leave the emotions out of it!!

  11. Kevin Murphy says:

    Clearly appropriate to residential properties; which is why commercial, Single-tenant, NNN properties with long-term “A”-rated corporate leases with escalations are a better deal for the passive investor. In fact, utilizing a TIC (Tenant-in-Common), DST (Delaware Statutory Trust) or a real estate syndication, commercial ST/NNN properties can provide much greater diversification which should be the “Fifth” thing to avoid (geographic or market concentration).

    I also think that the “Sixth” thing to avoid is product concentration but residential investors never seemed in the past to believe that either the 5th or 6th condition to avoid woiuld ever hurt them.

  12. Bill Gunby says:

    Ryan, with 30 years’ of asset/property management experience, I can say that you hit the nail on the head. But having done multi-family, commercial, and office/industrial as well as single family, I will add that the property management methods required for each type is usually quite different. I could (and probably should) write a book about the differences! I’d love to head up an asset management operation for an investor who avoids the “concentration in one type of asset” problem, and who understands the value of diversity.

  13. great tips – although the closer a property is the less likely your prp mgr is going to steal from you!

  14. karen says:

    My favorite in your list is #3 – Too Many Upgrades.
    I see that again and again and hear it from our students all the time. Landlords “over fix” properties, put their heart and soul (and cash) into it, then tremble when they drive by and the tenants haven’t mowed the yard and have an old sofa on the porch.

    Don’t fall in love with your property!
    It’s not personal, it’s an investment!

    Thanks for the post.

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