Mythbusters: Positive Cash Flow
Positive cash flow with a San Diego property… Does it exist?
In the early 2000’s many of Southern California’s population became “real estate investors”. In 2005 a licensed real estate agent shared his philosophy with me: Appreciation rates of 20%+ per year will be sustained indefinitely; therefore, the smartest thing for a person to do is to stretch to buy the most expensive house he or she could finance. For the record, I did not make this up! Real estate “investors” were buying homes with huge monthly negatives in hopes of the appreciation covering the cost when they sold. Let’s be honest, a LOT of people made a LOT of money following this practice. However, we also need to account for the fact that a LOT of people also lost a LOT of money. Basic investing principles were thrown out the door and home prices were pushed above sustainable levels. It was a game of hot potato. The problem was that not everyone was in on the game. A large portion of the newly titled real estate investors were not aware that the strategy was not going to last. With the average home price increasing at a billion times the increase of the average rent (this may not be an exact figure), buying true cash flowing property in San Diego County became a myth. For several years, finding cash flowing rental property in San Diego County was like hunting the chupacabra.
One of the positive sides of the market correction has been the return of logic and reason based investing in our area. I am not saying that ALL of today’s investors are using logic and reason (let’s not get crazy) but the market itself has come back to sustainable levels that allow logical investors to do their thing. This is a unique and valuable opportunity. Not everyone has caught on to the full potential of the current market. Just today, I read a real estate blog that praised the ability to break even on an Oceanside rental property… as long as you do your own management, pay no utilities, have no vacancies and don’t account for maintenance costs. The blogger was a supporter of holding property for future appreciation with “minimal” monthly cost. There is a time and place for this kind of investing. We don’t subscribe to the same principle in the current market. Long term appreciation is great and will most likely happen but, in my book, this falls back into the category of speculation. There is no need for speculation in the current market. With research and market knowledge, true cash flowing properties are back in play. Here are the basics of a property we recently closed for one of our investor clients:
*Area: Lemon Grove
*Property type: Duplex (two story, 3 bed units with yard and garage)
*Condition: Fair (total repair bids came in just under $20,000)
*Market rents: $1,400/unit (total $2,800)
*Purchase price: $242,850 with a $4,850 credit from the seller (net purchase price = $238,000)
*Closing date: 12/20/2011
With down payment, closing costs and rehab our client has $78,953.50 into the deal. The monthly mortgage payment (including property taxes and insurance) is $1,248.62. Including the mortgage payment, property taxes, home owner’s insurance, a 5% vacancy factor, 8% for property management, and $250 per month for utilities and miscellaneous expenses brings the total estimated monthly budget to $1,862.62 per month. With gross rents at $2,800 a month, the estimated monthly cash flow is $937.38. That gives us an estimated cash-on-cash return on investment of over 14% and does not take any future appreciation into account. As I stated earlier, future appreciation is likely, but is icing on the cake. Please note, the cash-on-cash ROI’s for the transactions we have been working on have been averaging between 5% – 15% depending on property area and condition at time of purchase.
The chupacabra exists! The amount of cash flow available in today’s market is not expected in a “normal” real estate market. To be honest, we have had a hard time finding it in other parts of Southern California. The current circumstances are unique. Fortunately, while these deals are not easy to find, they are out there and available to willing investors in the current market.
