do i have enough cash flow?

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do i have enough cash flow?

Nam NguyenPro Member
Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes

Hi,

Just signed up yesterday, and the amount of information available has been a bit overwhelming.  As I read the various articles and hone in on what I REALLY want to do I'm hoping I can get some advice.  My goal is to someday have enough properties to donate to charities that help Sexual Assault Victims, especially at colleges.  If any of you follow college football then you probably know about the Baylor situation with Art Briles.

The low down: 

Purchased a Fort Walton Beach, FL townhome in 2011 via short-sale when I was stationed at Eglin AFB ($64,000 @ 4%). I used my VA loan to buy it with no money down and it was my primary residence for 1-year due to my overseas relocation in 2012. It has been renting out since then at $900.

After property management fees, mortgage and escrow payments I bring home about $200 per month.  How do I know if I'm making the most out of my property?  I'm confused with the term "cash flow" and a part of me thinks there is a strategy (or two!) out there that will help me better utilize the townhome for profit.  I have some cash saved up to pay for the mortgage completely (about $40k) but I've read on this forum that paying off a mortgage isn't the best move.  

Thanks!

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Rudy Hernandez
Investor · TX · Member since 2017 · 67 posts · 22 votes
9y
Nam Nguyen Hi Nam this is a great question and one that every investor has a different definition for. After being on bigger pockets I have redefined what cash flow means. Your post stated that after mortgage (I assume tax and p&i included) as well as management fee you are getting $200.00. What you are missing are the following: Vacancy %; Capex %; and Maintenance and repair %. By % I mean you should calculate a fee from your profit to cover these expenses for the future. It's almost like your savings account. This is if you're truly trying to become financially free and not have a day job in the future. When you calculate you would take $900 * 5% vacancy and subtract that from your profit. You do the same for the rest. That is just as example. I would advise on finding out what your common vacancy rate is in your part of town (your PM should help give you that). As for repair and capex a good rule of thumb is using 5-10% for repair and that depends on age of home and up to 10 % for capex again depending on age of the home. Hope this helps.
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  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    @Anson Young

    @Anson Young

    @Anson Young and @Arianne L.

    Just finished your podcasts and you two were great!  

    0Reply
  • Effram Barrett
    Real Estate Agent · Houston, TX · Member since 2017 · 159 posts · 161 votes
    9y

    Net operating income (NOI) is the difference between your income minus your expenses. Cash flow is the NOI minus your debt or mortgage payment. $200 + cash flow is not bad on a town house in my opinion

    And what ways do you think there are to utilize your town home more efficiently? I'm not sure if there are ways to generate more cash flow outside of forced appreciation such as remodeling it.

    I know there are several multi unit owners who add in things like a laundromat or daycare to generate extra income within the rental.  

    Are you thinking of investing in Houston @Nam Nguyen?

    0Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    @Effram Barrett: I am thinking about Houston.  My family lives in the Greenspoint and Bear Creek areas, and I'm hoping to learn enough to buy a few rentals someday.  Thank you for the advice!

    0Reply
  • Rudy Hernandez
    Investor · TX · Member since 2017 · 67 posts · 22 votes
    9y
    Nam Nguyen Hi Nam this is a great question and one that every investor has a different definition for. After being on bigger pockets I have redefined what cash flow means. Your post stated that after mortgage (I assume tax and p&i included) as well as management fee you are getting $200.00. What you are missing are the following: Vacancy %; Capex %; and Maintenance and repair %. By % I mean you should calculate a fee from your profit to cover these expenses for the future. It's almost like your savings account. This is if you're truly trying to become financially free and not have a day job in the future. When you calculate you would take $900 * 5% vacancy and subtract that from your profit. You do the same for the rest. That is just as example. I would advise on finding out what your common vacancy rate is in your part of town (your PM should help give you that). As for repair and capex a good rule of thumb is using 5-10% for repair and that depends on age of home and up to 10 % for capex again depending on age of the home. Hope this helps.
    3Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Nam Nguyen For what it's worth, it doesn't sound like you have allocations for vacancy and cap-ex. Consequently, odds are that you won't get $200/month over the long term. That doesn't necessarily make it good or bad. If you sell you have to pay agents, depreciation recapture, and I'm guessing there will be capital gains given your purchase year. That said, if you have a "decent" or "mediocre" investment I wouldn't double-down by paying off the mortgage to force it to perform better. You really have to juxtapose how it would perform against options in Houston. I know this isn't an "easy" answer but I'm rarely (if ever) a fan of paying off "cheap money" early. And even though today's rates are still (historically) crazy low, they're higher than 4%. I'm presuming that the 4% is locked in for a 30-year fixed timeframe.
    0Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    Thank you for the advice. If there are any more opinions please post. 

    The loan on the property is a 15-year fixed with Wells Fargo. 

    1Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    Oh and I definitely do not have any of the other percentages that were mentioned here included into my basic numbers. Never knew to include those but now I will. Thank you!

    0Reply
  • John PowellPro Member
    Real Estate Agent · Kennesaw, GA · Member since 2015 · 308 posts · 153 votes
    9y

    @Nam Nguyen I live in the local area stationed at Hurlburt and live in Niceville. if you have had the same rent since 2011 then you are likely low on rent you could prob have the PM start to increase that over the next few years. If you PM me with specifics i can take a closer look for you even swing by and give you an update. As far as your original question if  you should pay it off or not that is a truly personal choice. What are your goals what else would you do with the money? If your still active duty or have a stable w-2 income using that $40k you could expand and buy more real estate.  If you are looking to transition out of the military the cash might come in handy or paying off the property and having a larger stream of income may be more helpful. I would not pay off the property if it wipes out your savings because the next day you will need a roof or some other issue. 

    0Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    The rent started off at $800 when I left in 2012.  Since then it has gone as high as $950, and right now it is sitting at $900.  The 15year escrow pays for principle, interest, county taxes, and insurance.  I have $95k liquid cash stuffed in shoe boxes, and my credit score is in the 800's.

    I definitely don't have the numbers Rudy Hernandez and Andrew Johnson have mentioned in previous posts, and now I'm thinking I'm actually either breaking even or losing money.  I recently had to replace the entire backside of the unit with almost $3000 worth of hardy siding because I was tired of paying $800-$1000 a year (on average) to replace wood rot.  I definitely see your point with your roof replacement example.

    Also in my 5 years the unit has averaged being vacant 1 month per year.

    Short term: I'm at 11years active duty, and hope to retire from the USAF so I can pursue becoming a sky diving instructor around the world.

    Long term: I want to have enough rental properties to fund a charity.  

    The moment I signed up for the forum is the moment I left my ego at the door.  I didn't have much to begin with, but hearing how I've screwed up is better than not knowing at all.  Is there a particular calculator I can use to re-evaluate this property?  It has rented fairly well, and I have no plans on ever selling it.  I am also ready to get more properties, but I don't think I can just pull the trigger again without help.  Thank you for responding, and please keep it coming.  

    0Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    Another idea was to also go ahead and pay off the $42k (since I have some cash).  That way the unit could eventually become a positive cash flow property.  Man I've got a long way to go if I want to buy 1-2 rental properties per year.  

    0Reply
  • Jonathan Jaime Velarde
    Rental Property Investor · Thousand Oaks, CA · Member since 2017 · 147 posts · 48 votes
    9y

    Check out the rental property calculator on this site!! It is under the "Tools" tab.

    0Reply
  • Ryan Baker
    St Petersburg, FL · Member since 2014 · 65 posts · 22 votes
    9y

    Is there an HOA for the townhome? If so that could be factored into your cap-ex reserves as well. You probably don't need to plan for the 10% usually reserved for SFH capex (although it certainly won't hurt you), but you will need something.  If you're cashflow positive with these numbers in place, using that additional money to buy more properties would probably help secure your goals.  How many properties do you think you'll need to accomplish your goals?

    0Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    There isn't an HOA.

    Just did the math with help from @John Powell and my property gets me a cool $7.50 per month lol.  

    1Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    Sounds like you might have a 15-year mortgage? (You mention "15 year escrow".) If so, that's going to lessen the amount of cash in your bank account each month, as your mortgage payment is higher than it would be on a 30-year amortization. You also mention $90k+ in liquid cash stuffed in shoeboxes. A note of caution: you do you with your money, but when you go to get a mortgage, the underwriter is going to be hesitant about undocumented cash. If you want a new mortgage any time soon, consider having that cash in a bank account long enough for the deposit to not have appeared on either of the last 2 full bank statements. Citi just finished a promotion where they gave $500 for keeping $50,000 with them for 2 months. Chase seems to be continually running a $500 promotion for opening and checking and savings account and having $15k with them. You might look for something like that to make it worth your while.
    1Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    Hi @Dan Schwartz

    I was joking about the shoe boxes lol.  My savings account might as well be a shoe box consider how little I earn in interest.  I don't even make a enough interest for Bank of America to send me a tax statement.  Apparently you need at least $20 of interest per year to make it worth their time.  

    I did say 15-year escrow, but yes it is a 15-year mortgage.  I didn't know what terminology to use because my monthly payment gets divided into principle, interest, county taxes and insurance as you already know.  The 15-year mortgage was done because I always thought paying off a debt sooner was better than having one linger.  A 30 year mortgage would have saved me about $170 in principle (if my loan calculator app is correct).  

    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    Nam Nguyen , makes sense. There was a thread not too long ago where someone had a large pile of actual cash and wasn't able to put it towards his downpayment, due to underwriting standards. Looks like you're in great shape! Good luck with everything.
    0Reply
  • Arianne L.
    Investor · Fort Walton Beach, FL · Member since 2015 · 568 posts · 966 votes
    9y

    @Nam Nguyen $900 rent for a 64k purchase price is pretty good. Plus you had 0 down so your cash on cash is amazing. I would've preferred a 30 year note but since you want to pay it off sooner I get why you have a 15 year note.

    Some people like to have the maximum return on investment on every dollar. And in real estate we can use leverage so that increases the return on our cash since we can borrow money at a lower interest than what we pay.

    If you can get a 10% cash on cash return on your 40k cash, then I wouldn't pay a 4% a year mortgage. You are better of investing that somewhere else. It is fairly easy to achieve 10% cash on cash with rentals or lending

    0Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    9y

    Even if you net out 0, you have 0 down into this property AND a 15 yr note which you'd be almost halfway done with I'd say you're doing alright. Do you rent to a military member, if so you renting for close to what the BAH is? At least with military member you know you can always get your money by contacting CoC if things went bad.

    0Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    @Arianne L. I've decided to just hold off on paying the 15-year loan off.  I'm just struggling with the idea of leaving it in the bank and earning next to nothing.  I can't seem to find any properties in/around Fort Walton Beach, and I missed out on the other properties that have been selling on the same street.  One positive is all of the things I've learned from BP in the week I've been a member.  

    1Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    @Matt K. The renters have been mixed, but so far the experience has been ok.  I'm not looking for a huge return on every home because I think I'm a buy and hold type of guy.  

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Keep in mind a as investor cash is extremely valuable. Most will value it at a bare minimum opportunity value of 10%. Due to it's high value the maximum possible cash flow is obtained with 100% financing. You do not want to pay down a investment property due to the high opportunity value of cash. A 4% mortgage paid down or off with cash worth 10% produces a 6% loss.

    Equity in a property will always reduce your true cash flow and produce artificial cash flow at a very high purchase price (10%).

    For maximum true cash flow you want the longest mortgage term possible and you do not allow dead equity to sit in a property.

    2Reply
  • Zach WesterfieldPro Member
    Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
    9y
    There are properties to be had in the area. If you can go to the investor meetings and network. My experience is there is a disproportionate number of wholesalers in this area, which as a buy means people competing to bring you deals. My recommendation is to first establish your criteria, then go to a few meeting and get on some buyers lists. You can find deals as good or better than what you described here
    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Rudy Hernandez:

    Nam Nguyen

    Hi Nam this is a great question and one that every investor has a different definition for. After being on bigger pockets I have redefined what cash flow means. Your post stated that after mortgage (I assume tax and p&i included) as well as management fee you are getting $200.00. What you are missing are the following: Vacancy %; Capex %; and Maintenance and repair %. By % I mean you should calculate a fee from your profit to cover these expenses for the future. It's almost like your savings account. This is if you're truly trying to become financially free and not have a day job in the future.

    When you calculate you would take $900 * 5% vacancy and subtract that from your profit. You do the same for the rest. That is just as example. I would advise on finding out what your common vacancy rate is in your part of town (your PM should help give you that). As for repair and capex a good rule of thumb is using 5-10% for repair and that depends on age of home and up to 10 % for capex again depending on age of the home.

    Hope this helps.

    You are on the right track, but CapEx $, not CapEx % please. When the roof goes out, does the roofer ask you what the place rents for first, then applies a % of that rent to calculate the bid? If your roofer doesn't calculate it that way, then why would you as an investor?

    Also, I'd add ... what is the "quality" of the cash flow? Does it come in very reliably, or is the PM going to have to chase the tenant all around town every month to collect rent, only to find that one day they have skipped town without paying? Is the cashflow tending to grow or diminish over time? Quality is every bit as important as quantity.

    Finally, cash flow is an important thing, but it is not the only thing. The profit centers of REI are:

    1)Cash flow

    2)Appreciation (both forced and market)

    3)Mortgage pay down (amortization)

    4)Tax savings

    In order to get the full picture of the total profitability of the property, an investor must analyze and manage all 4 of these from the day of purchase all the way to the exit of the investment. And since all investments involve some level of risk, then this total return must be judged within the context of the risk taken in order to achieve these returns.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Nam Nguyen, I recommend you use your $40k as deposits for TWO more similar properties (@ ~1.5%/m rent). 

    And if you haven't bought a (VA loan) primary since moving, why not buy another one of those, as well?

    You might like to refinance your current loan too, so that ALL of them have 30 year notes?

    Thank you for your service. All the best...

    0Reply
  • Rudy Hernandez
    Investor · TX · Member since 2017 · 67 posts · 22 votes
    9y

    @David Faulkner actually you can add it as a percentage if you know the life of your roof and what % of your profit will get you to replace it once it reaches that end life. Same thing could be calculated using just $. 

    1Reply
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