By Gyna McElwee
I’ve rehabbed over 30 properties in the past few years. I did not initially want to be a landlord. I wanted to buy, fix, and “flip”. In order to be self-employed, you need to get paid. It did not occur to me, at the time, I was giving up my steady paycheck by “flipping” each property, I needed cash flow in order to pay my expenses and to pay myself.
Cash flow, simply put, is what is left from the rent collected (this can also be money received from laundry and parking) after paying the mortgage, utilities, taxes, and other expenses. The ideal situation is to have a positive cash flow (money left over) after all expenses are paid. Some investors set a bottom line cash flow and if a property does not meet this bottom line, they may pass on the property.
My analysis begins before I actually purchase the property. It is important to research the market rents in the area. It is important to research the Section 8 rents in the area. It is critical that you know the average time it takes to rent a property. This lets you know when you should start advertising your property. You do not want to compete with everyone else! Make sure you know what you can or can not get for rents because this affects your cash flow/paycheck. My tenants pay for all utilities, except for the water bill, and they are responsible for taking care of the lawn and removing the snow. This drastically reduces my expenses so I basically have to factor in the mortgage expense.
It is so tempting to refinance your property for as much as you can. You have to remember that the more you borrow, the bigger your mortgage payment. Your interest rate may also increase as you borrow more money. The better prepared you are, the bigger your cash flow/paycheck. I usually refinance my properties for no more than 80% of the after repair appraised value. I depend on the professional services of an experienced mortgage broker. My personal broker will put me in contact with one of his appraisers to help me access the amount for which the property may appraise. We discuss the interest rates and the maximum amount I can borrow. With this information, I determine how much rent I should charge. The ideal situation is that the rent covers the mortgage and there is a little left for emergencies and to pay yourself.
As an experienced investor, I can tell you that sometimes the rent will only cover the mortgage. This is a break-even situation. I do not automatically pass on a project just because the end result is a break-even situation. Sometimes in the past the anticipated appreciation of the property makes it attractive to hold. I have had property values literally double in value after holding onto them for a year or two. Of course, you do not want your entire portfolio to consist of break-even situations because you will never get paid.
Each property is unique and with the industry changing so quickly, it is wise to evaluate and do your research before deciding which direction to go. It is important to have a diverse portfolio to keep you afloat during trying times. The money will come by way of cash flow and appreciation. One of the basic keys to acquiring wealth is cash flow which equals keeping the property. Just ask Donald Trump about holding on to properties!
