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Why is Cashflow so Hard to Find?

Why is Cashflow so Hard to Find?

One of the most important aspects of being a real estate investor is understanding the price structures of properties. If I buy this property, will it cash flow? Meaning, will my property tax, insurance, principal, and interest payment be covered by the revenue that the property can bring in? There are several factors that have caused prices in most areas of the United States to go up very high.

The truth is, you have no further to look than the Fed, which controls interest rates by charging banks and financial institutions. Interest rates in recent months and years have been extremely low. So, when factoring in what your actual costs are going to be for buying a property if the interest rates are low, it means that you can pay a higher price for the property and still be OK. The problem with that is, prices are continuing to go up, which further complicates this massive migration that no one seems to really go into because it’s a political hot potato. With extreme restrictions on Covid and the way some states have handled the situation, many people have decided to move to states that are more business friendly and less restrictive.

You have no further to look than the example of Tesla. Tesla left Northern California and moved to Austin Texas. Larry Ellison moved Oracle from California to Texas. People selling their houses in Northern California were able to sell them for large amounts of money and move across the country. People overpay for a property, which then becomes the standard for an area. Obviously, prices went up, but the same thing is happening in New York. People are moving to Florida, Tennessee, North Carolina, South Carolina, Georgia, Kentucky, Louisiana, and they’re willing to pay more than fair market value for a property. The cash buyers that don’t need a mortgage can overpay as well and that now becomes the new standard for what properties are worth in an area.

People in their 40’s, 50’s, and even their 60’s can buy a property at fair market value when the property does not cash flow and hope the property appreciates over the next 10 years. One way to make a house cash flow is forget about doing a traditional rental/tenant but turn it into a house for a visiting nurse or visiting doctors. This means the property would need to be close to a large medical center. The projections are, in the future, there’s going to be a shortage of medical professionals. There are nurses that are making large amounts of money to work on a six-month contract. You could also do Airbnb. As an example, a four-bedroom house that could rent for $1800 a month could rent for $250 a night so if you only rent it for 10 days out of the month that’s $2500. If you rent it for 28 days out of the month that’s $5000. If you rent it for 30 days out of the month that’s $7500. Now that property will cash flow, simply by renting it out for two weeks out of the month. It is important to note that if you do an Airbnb it needs to be close to resorts or close to where people want to be like sports activities, amusement parks, or just simply a getaway in the mountains.

Before you buy any property, you need to have a strategy on how to maximize the potential income from the property and have an exit strategy as well. For someone reading this article, maybe you’re thinking about a refinance. A rule of thumb, you need to be able to reduce your interest rate by 2% or it doesn’t make sense to refinance with the closing cost that you will incur.

Another example of maximizing rent is if you’re in a college town, do student housing with lock offs, meaning that every renter has a deadbolt lock on their door. If you do this get the parents to guarantee the lease as well as the students. If you’re buying raw land, let’s say 100 acres or more, it could be set up for hunting. People pay a lot of money every year for the privilege to hunt. Lakefront and riverfront property is also an awesome opportunity for the new buyer of the property to do an Airbnb. Buying a duplex, triplex, or quadruplex, can often increase the buyer’s chances of having a positive cash flow.

As an investor you will hear instructors sometimes say there’s a 1% rule, which means you multiply the purchase price of the house by 1% and that’s how much your rent should be. In a lot of areas of the country that doesn’t work anymore so you’re forced to look at ways to increase revenue. As we stated earlier, the one caveat you need to know if you do an Airbnb or visiting nurses or doctors, you will need to stage the house, which means you need to furnish the house with appliances, tables, furniture, etc. but when they move out you can charge a cleaning fee.

The point is, do not buy property based on emotion. Buy a property based on analysis of how to maximize your cash flow and maximize your tax write off ‘s. When looking at commercial real estate, like a mobile home park, storage facility, or strip center, the capitalization rate is a very important component for what you pay. Commercial properties are being sold for as little as a 3% to 5% capitalization rate. With the proper knowledge you can reduce expenses and increase revenue, which will raise the value.

Knowledge is POWER!!!! .

Areas of Review

Takeaway

Big picture takeaway points

  1. There are several different types of zoning.
  2. Look at real estate for what it can be, not what it is.

Reflection

Self-reflection questions to think more about the content

  1. How can zoning affect my income and taxes on a property?
  2. Do I have a self-directed IRA, and if not do I know how to open one?
  3. What is my city’s 10-year growth plan?

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