Need a second opinion if this cash flows or not? It looks as no?

Question

I have tried to crunch these numbers and I'm getting a negative cash flow on this property. Could some one please give me a second opinion on this? Greatly appreciated.

Joe Villeneuve · Answer

You make a very valid point @Tim Ryan.  There's a reason, usually with $ in front and the words "Cash Flow", behind, that those of us in the Midwest (especially SE MI) have so much "Out of State" interest in their TurnKey Hold Programs.  The Only concern to the Out of State Investor seems to be the issues of trust in the deal.  The OSI doesn't know the markets where the property is in well enough, or the seller well enough, or the PM well enough, or the tenant..., you get the picture.

The solution we've come up with is instead of selling the entire package, just sell part of it (Equity Transition).  This way, the seller retains enough of the deal to make it in the seller's best interest to make sure the deal is good.  The seller isn't going to get involved with deals with a lot of problems just because it has nice CF since the seller's remaining responsibility in the deal is the deal management.  This means the seller has as much at stake as the buyer in the deal after it (Equity Transition) is completed.

It should work something like this.:

1 - The Seller puts all the initial cash into the deal, makes it a TurnKey, holds in an LLC, 2 - Makes a "%" of the LLC available to other investors (this is where the OSI steps in), 3 -retains a certain "%" of the deal for the management, and...4 - ...the deal is made.

The OSI gets the benefits of the much higher cash flow from the Midwest (SE MI in my case) by using the profits from their flips in their markets.  Flip a property in their market and make a $30-$60k profit.  Can't do much with that in their market with the goal of building cash flow. However, take that same profit into SE MI and by a "%" of a deal that immediately generates $400 +/- in NCF.  They keep flipping at their end, and keep buying into the CF deals at the other end using each new "profit" generated.  Doesn't take a math major to figure out how fast this system can accumulate monthly income.  This takes full advantage of the "higher" cost of REI in their markets for bigger flip profits, and the "lower" cost, and higher CF of REI (sometimes the same property) in this area.  Best part is this.  Since there's no loan involved, there's also no seasoning involved.  I've seen deals go from initial purchase to full Equity Transition so fast that, ...swoooosh...there goes another one.

Joe Villeneuve · Answer

No...you have negative CF for the next 10 years.  Your CoCReturn is only 10.5%.  Do not mistake the fact that paying 100% for a property in cash, is somehow improving your CF wince you have no debt.  All you've done iw pay for all of your negative cash flow upfront.

What's worse, is your cash (the $1,025,000) is now dead.  That money, instead of working for you compounding itself, is just sitting there doing nothing....and yes, I know it is "equity".  Equity buildup will never keep up with cash reinvestment.

Thomas S. · Answer

It looks like your all cash investment is earning 4.13%, which is gawd awful, leaving the building itself earning absolutely nothing. Do not invest 1M for 4% return.

Equity in a property should be paid a 10% return off the top of the rent before any other deductions are made. 1.025M at 10% is $8541/month. You are already negative $541/month and that is before any other deductions. In total you are losing about 60K/ year on this investment.

I might think about passing.

Audrey Ezeh · Answer

You need to account for capital expenditures. That will put you further in the red. I'm not the expert by any means but I'll probably pass on this or find the number at which it cash flows and make the offer :) Good luck!

Need a second opinion if this cash flows or not? It looks as no?

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