Every deal that I analyse never produces CASH FLOW!?!

Investor · Mercier, Québec · Member since 2015 · 8 posts · 1 vote

Hi everyone,

I am actively looking to buy a multi family building here in Quebec, Canada (preferably a 6 unit). I analyse deals every day and there is one thing that bothers me.. I never seem to get a cash flowing property!

I do think that my numbers are correct and I take into consideration expenses correctly (I read a lot on blog posts and forums about how to analyse deals).

I know that everywhere, everybody is talking about how cash flow is king and realize the importance of it. But is there more to a property than cash flow, or it should be the most important factor in my buying decision?

I know that my question is pretty vague, but does anyone seems to have a similar problem, or any explications or tips of any kind?

If you need any more specifications such as numbers or anything else, let me know!

THANKS!

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

I'm sure if you were to plug in some basic numbers from my properties into your spreadsheets they likely wouldn't cash flow either, but I had $70k in free cash flow last year.

I'll keep buying the properties I do and growing rich while the novices say they would never buy the properties I buy.

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Thomas Barksdale
Haverhill, MA · Member since 2016 · 42 posts · 4 votes
9y
I always thought the idea behind investment is to make money you have 6 individual income from this property total the rent by what your your paying out of pocket increase each of the rent a little too make it work good luck you shouldn't be loosing money in any market as a landlord.
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Jay J.
Investor · East Haven, CT · Member since 2016 · 53 posts · 25 votes
9y
I am sure there may be cash flowing residential properties in Calgary.
The key is to find distressed property that makes you smell panic in the air. If the whole market was a crash due to one single factor, say, oil price, and if there are signs of diversified industries in this market doing ok (not great due to atmosphere), then prepare cash and start looking at deals.
Remember to be greedy when people are scared and to be scared when people are greedy.
I slightly disagree with one comments about saying great wealth comes from leverage + appreciation. I think Warren Buffett's ideas fit better for me. Safety first.
Just make sure don't jump into an overprice asset just because you can't find cash flowing deals and you can't sit on your hands tight.
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Eric P.
New York City, NY · Member since 2016 · 470 posts · 348 votes
9y
I agree with @Jay J. - I see people afraid to sit on their cash so they jump into overheated RE markets that were great 2-3 yrs ago but maybe not so great now. Buying at the top of any market is never a good idea.
Also beware the ARM. Rates just jumped half a percent in one week. Caveat emptor
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Jon Borowski
Maspeth, NY · Member since 2016 · 9 posts · 4 votes
9y
If the property doesn't cash flow, then it should appreciate in value a lot. If not, then don't do it.
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Gerardo Dominguez
Real Estate Agent · Chicago, IL · Member since 2015 · 238 posts · 101 votes
9y
@Olivier Pare Trust your numbers! You might just be in a hot market right now where it's harder to find a good cash flowing property. You can either wait it out or start looking to buy elsewhere.
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Olivier Pare
OP
Investor · Mercier, Québec · Member since 2015 · 8 posts · 1 vote
9y
Originally posted by @Sael D. Nemorin:

Hi Olivier.
It looks like you're underwriting turn key rental properties that are for sale on MLS. In most cities in Canada, you'll find buying a rental property at market value is not going to give you the cash flow you might require for your circumstance or desire. Have you looked at multi family properties that are privately for sale? Estate sale? Bank owned? Properties that can be assigned to you who are under contract? Have you looked at reaching out to a real estate friendly investor? Depending on your resources, skills, contact and knowledge you can find properties where you can buy under market value, renovate, refinance and get the desired return you require. Financing will also be a big component to this strategy. We have 3 levels of financing in Canada. You have the schedule A market, alternative market and private market. Depending on your credit, income, documentation, access to funds and experience, you can find lenders at any of these 3 levels to finance a potential deal that requires work and take out financing when you're done. Make sure to conduct a construction proforma, a buy and hold proforma to understand your numbers and to make sure you can pull out when you're done the work. If you're a pro member on BiggerPockets, they have these tools. Understanding also how all 3 levels of our lending industry works in terms of adjudication will help you structure your deals properly. Feel free to reach out to me privately if you have any specific questions.
To your success,
Sael.
Great advice, thank you very much! It's very appreciated.
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Olivier Pare
OP
Investor · Mercier, Québec · Member since 2015 · 8 posts · 1 vote
9y
@Gerardo Dominguez @Jon Borowski @Eric P. @Jay J. Thank you very much to all of you guys! Very good and inspiring answers from all of you, I appreciate. I guess I will start looking in another market, cause I got my financing in order already and don't want to sit on my hands for too long, but don't want to make a bad buy in my area because I want to do a deal too fast. Thanks!
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
9y
Originally posted by @Eric Bilderback:

@Russell Brazil Novice here, out of your 70k cashflow how much was purchased in 2016. I am not seeing this market anywhere like it was a couple years ago, and I am not the only one. Even dudes who aren’t big dorks with lame *** spreadsheets are discouraged at least where I am at. I think realistically if you wanted 70k a year and put (25% down to get it) in my market you would need to put close to 700k down. That is much different then it was only a few years ago. Answering the initial question less cynically because I would like to here how a guy like Russell goes through numbers (assuming he must) and if he sees something I am missing. I do find places that I know are being rented for less then market and they seem to be unaware of how much market rent is. Many times you do inherent a lease but that is no big deal. Wait until it is up and bring rents to market then your back to 10% cash on cash. I do almost strictly muti-families and I know how much places should rent for and really every place in my area personally. People who have owned these things for 20 years or recently inherited one may not pay as close attention. So when you are running your numbers use what the market is not the current rents (current rents is what you use for negotiating, not knowing the current value). That being said I wanted to do a couple of partnership type agreements in the next year where I found a great property and brought in a buddy or two as passive investors. I have put that on hold because at this time I am not seeing the opportunity that I was not to long ago.
A typical property I buy these days is a single family home valued between $400 and $450k and rents for between $2400 and $2800. The last purchase I made in this asset type was for $415k and the rent started off at $2600. Tenant just moved out and I rerented for $2750. I'm sure if most people plug $415k and 2600 into their spreadsheets they wouldn't buy that asset, but that's because they don't look at the whole picture. In under a year my rent growth was 6% and my asset went up in value about 5%, while I was also able to lock in about $325k in debt at a low rate.
In 2015 I had roughly $10k in extra free cash flow just from raising the rents on existing properties. 2016 will be down as I just sold off my multifamily I owned. I didn't make any purchases in 2016, but I did in 2015. 2016 I sold off some to reposition for 2 large purchases, which will likely fall in the first half of 2017.
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
Originally posted by @Zachary C.:

@Jeff B.,
Do you just get better at estimating that overtime?
Yes and estimates come in different levels.
Looking a just a listing, the first pass is very rough and should be viewed as suspect.
Without a stated Expense number, you have to even estimate that, so it's an estimate from estimates; not trustworthy. The 50% rule is a start, but I've used 30% as it tracks my management style.
If there's a stated NOI, then you don't guess at expenses, you calculate GSI - NOI. Question: is the NOI accurate or inflated?
The point of a first-best-guess evaluation is only to get to the GO-NO-GO point, "AM I INTERESTED" - - should I delve deeper?
If so, ask the listing agent for the last year's PnL - - "I need this to evaluate my offer". If you get it, then your evaluation can improve greately.
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Eric Bilderback
Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
9y
@Russell Brazil
Last question Russell. My fear is that rents may not grow. I personally am still making offers, and even closed on a 6 unit a couple months ago. I remember listening to your podcast and I agree with you about being in for the long haul. But when I am talking to people who want to invest in real estate these days I don’t feel like it is no-brainer like it used to be. I hate to discourage potential clients but I don’t see the opportunity for a guy to get into something and with a little luck and some handwork, can end up financially free in five years. Do you disagree?
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
9y
Originally posted by @Eric Bilderback:

@Russell Brazil
Last question Russell. My fear is that rents may not grow. I personally am still making offers, and even closed on a 6 unit a couple months ago. I remember listening to your podcast and I agree with you about being in for the long haul. But when I am talking to people who want to invest in real estate these days I don’t feel like it is no-brainer like it used to be. I hate to discourage potential clients but I don’t see the opportunity for a guy to get into something and with a little luck and some handwork, can end up financially free in five years. Do you disagree?
I do disagree.
The greatest economic force that exists is that of inflation. There is simply no stopping this force over the long term. Inflation can either be your enemy or your ally. I choose to have inflation as my ally by owning real estate.
Rents don't grow every where. I own properties with weak or no rent growth, as well as ones in high rent growth areas. If rent growth is important to you, then buy in areas of strong rent growth...just know that those properties will have a weaker price rent ratio to begin. I prefer properties with high appreciation and high rent growth potential. When I was younger and was more concerned with needing money I was more into buying properties with a high cash on cash return. You can't have your cake and eat it too.
I also don't know why anyone would think they could be financially free in 5 years. That seems like pretty lofty aspirations. People need to be realistic in their investment expectations.
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District Invest Group545 Reviews
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Eric Bilderback
Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
9y
@Russell Brazil
Not to split hairs here but on the five year independent thing I am being somewhat facetious (I did see guys do it however and do it big-time) but the upside was much bigger in my opinion 5 years ago even 2 years ago, at least around here. Do you agree that upside potential has diminished for people in the near and midterm, buying and holding real estate? In my tiny town and all over my area you could buy a duplex a few years back and rent out the other side and live in it for free practically. Those days are gone and in fact now if you want a duplex you will pay a premium. I agree and I don’t know of anyone who’d disagree that over the long run real estate will go up and inflation will be a key factor. But as the economist John Keynes said were all dead in the longterm.
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Antonio Nguyen
Real Estate Agent · Fairfax, VA · Member since 2015 · 29 posts · 5 votes
9y
Love it @Russell Brazil preach.
1 Reply
Philippe Busque
Investor · Saint Nicolas, Québec · Member since 2016 · 53 posts · 20 votes
9y
Originally posted by @Eric Bilderback:

@Russell Brazil
Not to split hairs here but on the five year independent thing I am being somewhat facetious (I did see guys do it however and do it big-time) but the upside was much bigger in my opinion 5 years ago even 2 years ago, at least around here. Do you agree that upside potential has diminished for people in the near and midterm, buying and holding real estate? In my tiny town and all over my area you could buy a duplex a few years back and rent out the other side and live in it for free practically. Those days are gone and in fact now if you want a duplex you will pay a premium. I agree and I don’t know of anyone who’d disagree that over the long run real estate will go up and inflation will be a key factor. But as the economist John Keynes said were all dead in the longterm.
The more competitions, the harder it becomes, its the nature of every ''money maker''.
A few make good money and have good opportunities at the start -> after a while they have more competitions -> less opportunities -> people who were massively successful at the start shift their focus from the business itself to the teaching of that business because the edges are not that big anymore -> even more competitions, etc.
I'm also from quebec and I have been looking for markets around me for a while, the biggest cashflowing market in QC is in Mauricie, trois-riviere/shawinigan. The downside is that it's old buildings with very few jobs, shawinigan is dying but trois-riviere seems to be stabilizing so there may be some opportunities there. In fact there are quite a few successful investor who started in trois-riviere. Personally I'm just not interested in flat roof century building with insanely high vacancies. Quebec city is just out of the question for me, you're paying around 100k$/units for a 2br/1ba and you can rent it for 700$ or 750$ in really good areas... no thank you. Some people ARE making it work thought, so there is a way, I just don't know it yet and I'm trying to figure it out.
So I'm looking and and waiting. I own a duplex and rent one of the units, I paid too much for it thought since I didn't know what I was doing... but it could of been much worse. The rent covers only my mortgage and that's it. In a few months I will have a roommate and will be in a much better position thought.
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Olivier Pare
OP
Investor · Mercier, Québec · Member since 2015 · 8 posts · 1 vote
9y
@Philippe Busque Yeah I get what you mean, I've looked at Trois-Rivières too but I think because of the University there and the city itself, there is way too much vacancy. Do you have any impression on the Montreal area or you're too far away to take a look at this market? Nice to talk with a fellow QC investor! and best of luck with your duplex!
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Chris WaltersPro Member
Montreal, Québec · Member since 2016 · 133 posts · 19 votes
9y
@Philippe Busque I've been looking at Trois-Rivières recently and was wondering if there is money to be made there. It seems interesting but rental prices are very low it seems.
@Olivier Pare I've been analyzing mtl for almost a year now and prices are killing cash flow. I found many properties that will have a negative cash flow. Either the current owners over paid initially, renovated above market value and hope someone will catch the bait or they are being greedy and over pricing the properties. One way or another, there is no way I plan to pirchase a egative cashflowing property. What cash-on-cash ROI are you getting when running your numbers?
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Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
9y
Real deals are hard to find and take a lot of sorting through properties that are not deals. Be patient.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
9y
@Eric Bilderback Five years ago is the exception, not the norm. You have to be good to win at most things and REI is no different.
There are certainly way to get rich quickly in REI but, for a majority of investors, it is a get rich slowly (or modestly) strategy.
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Eric Bilderback
Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
9y
@Mike Dymski
And that is all I am saying. I’ve seen this debate in here before and I don’t want to hijack this thread. 5 years ago was awesome today not so much by comparison. That being said I still invest in real estate, putting in an offer today in fact.
1 Reply
Olivier Pare
OP
Investor · Mercier, Québec · Member since 2015 · 8 posts · 1 vote
9y
@Chris Walters Well, with a negative cash flow from my analysis analysis, my cash-on-cash ROI is actually a negative number. I get around -5-8% if that's a possible thing to calculate
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Zachary C.
Property Manager · Huntsville, AL · Member since 2015 · 251 posts · 129 votes
9y
@Jeff B.
Thanks for that. Do you use NOI for all types of deals? I could be misremembering or thinking of something else but I feel like someone mentioned that is for larger deals, like multi-unit.
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Account Closed
Investor · Santa Clara, CA · Member since 2014 · 138 posts · 54 votes
9y
I'm not sure about Quebec , but in US there are many states where price to rent ratio
makes a lot of sense. I would never buy a investment property without solid cash-flow.
The rule of thumb is that your monthly rent should represent 1% of the purchase price.
Meaning if you buy 100K property you need to be able to rent it for $1000.
It definitely doable in US , and all my properties are cash-flowing nicely..
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Carlos Casanueva
Residential Real Estate Broker · Delray Beach, FL · Member since 2015 · 43 posts · 14 votes
9y
where can we get the going cap rate in an area? Some areas multifamily properties are selling for 8 cap, while somewhere else may just be around a 5.... how do we know what the market cap rate is in any given market??
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
9y
Originally posted by @Zachary C.:

@Jeff B.
Thanks for that. Do you use NOI for all types of deals? I could be misremembering or thinking of something else but I feel like someone mentioned that is for larger deals, like multi-unit.
You're probably remembering "cap rate", which yes, IS only for larger than 4-plex* deals.
But of course, all deals should calculate their NET income, to ensure the result is POSITIVE!
If smaller than a 5-plex*, any extra value-for-money is determined by sold COMPS. Cheers...
* Well, that's the line-in-the-sand size in the States, anyway. Canada could be different, eh?
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Account Closed
O'Fallon, IL · Member since 2016 · 14 posts · 14 votes
9y
If your deal doesn't cashflow from day one, then your strategy may be one of the following:
1) Create value through improvements in the property, branding, and management that will lead to an increased NOI. The increased NOI will give you appreciation (not in all cases, i.e. if cap. rates decompress) and possibly future cash flows (depending on how much you were able to increase the NOI by).
2) Wait for future rent growth in your submarket and for cap. rates to compress further (if you think that is a possibility) so you get the appreciation and possibly future cash flow.
Multifamily in Canada is almost viewed like a bond. Investors have been blessed with great appreciation in the last few years, but I think it is too risky to bet on future appreciation in Canada unless you can force it (the first strategy I mentioned).
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