Friday, November 6, 2015

Property Investing - CASH FLOW IS KING

Better yet -- “POSITIVE” CASH FLOW is king.

In any financial analysis of a potential investment, this should be at the top of the list as you review the opportunity it presents. In fact, as markets and prices continue to march higher, cash flow margins continue to feel the squeeze which only increases the overall investment risk.

Source: Polus Capital

Look at the following simple illustration to better understand what we refer to as CASH FLOW –

2000’ – 2 unit building
Purchase Price - $180,000
Net Rental Income - $16,000 (*)
(* NRI after all property operating costs – ie. taxes, mgmt., ins. are recovered from the Tenants)

This $16,000 represents an 8.9% return ($16,000 divided by $180,000), if we are looking at a straight cash purchase. However, when we consider arranging financing on the property, this cash flow becomes the source of dollars to make the monthly mortgage payment. If we assume a 3.5% mortgage rate on 70% of the purchase price ($126,000 - 5 year term & 20 year amortization) – the monthly payment is $729.12. After covering the monthly mortgage payment, the net annual income (after debt) is approximately $7250. Based on the cash flow in this example and the mortgage assumptions , the cash-on-cash return increases to 13.4%. This again highlights LEVERAGE, but it is only made possible based on the strength of the CASH FLOW.

Seasoned investment pros focus almost exclusively on properties that are cash-flow positive and make any assumptions based only on realistic projections. What assumptions are we referring to:

• Lease rate projections on upcoming renewals
• Leasing current vacancies and based on what rates
• Improvement allowances/incentives required to keep or attract tenants
• Impact of overall property upgrades (ie. roof , parking lot replacements) on cash flow
• Cash flow requirements to service the financing on the investment (aka DEBT SERVICE)
• Market trending up/down/sideways and its effect on your “EXIT STRATEGY”

Be a KING - a POSITIVE CASH FLOW KING, and wear your crown as you pursue every property investment! And for the record, the above example is an actual deal from 2014 and the investors are very pleased with this particular investment.

Let us know how you see things from your market area, and of course, we are always ON CALL to respond to your interest in the Windsor-Essex market.

Mark Lalovich
Office: 519-966-0444
Cell: 519-259-5434

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