If cash flow is the ONLY thing you are considering when investing in real estate perhaps you’re not seeing the big picture. Of course that is one aspect of it; however, it is perhaps not the MAIN aspect!
Here’s a great article I’d like to share with you on how to determine if your property has a positive cash flow (thank you to therealestaterenegades.com for letting us share).
“Basing your entire decision on the answer to positive cash flow question is a very limited way to look at an investment.
There are several things Canadian real estate investing beginners need to consider.
How much money are you putting down on the home?
Most Canadian real estate investing beginners don’t realize that it’s only been since about 2006 you can buy an investment property with 10% or sometimes even 5% in Canada.
Today Canadian real estate investing beginners have the opportunity to buy investment property with 10% down or even 5% down (even 0% down!) using standard mortage programs offered by Canadian banks (no funky hard money loans or vendor take backs – although these can be extremely useful and we’ll discuss them in another article).There are a few other things to consider.
Like, what are your financial goals?
Are you leveraging yourself for maximum advantage?
Are you using tax deductions like you should?
Are you forgetting that the mortgage is being paid down every month?
Let’s take a look at this more closely…
Let’s use a $250,000 property and assume that you have $55,000 to invest in real estate.
We could use a property of less value but a starter home for $250,000 or less covers almost all regions across Canada.
For you Canadian real estate investing beginners in downtown Toronto or Vancouver screaming that it’s impossible, a 45 minute drive out of the city will get you properties like this.
A 25% down payment on this property would look like this:
$250,000 Purchase Price
$52,500 required for 25% Down Payment
$1,055/month in carrying costs at 5.89% and a 40 year amortization
$225/month for Property Taxes
$55/month for Insurance
$1,335/month are your carrying costs
Can you rent out a $250,000 property in most parts of the country for $1,600/month or more?
Yes, definitely. Easily even.
So if you take the $1,600/month in rent and subtract the $1,335/month in carrying costs you’re left with $265/month in cash flow, right?
Well that’s how most Canadian real estate investing beginners look at things.
But it’s not uncommon to have at least one or two $300 expenses of some sort on the property throughout the year.
A pipe leaks, an electrical outlet stop working, a shingle goes flying off the roof, the furnace needs service…you get the idea.
When these hit on any given month is your property still a positive cash flow property?
Hmm…yes or no?
Well most Canadian real estate investing beginners use a very short window of analysis.
Typically, they look at a single month at a time and then when they get hit with that $300 repair they’ll scream something like this:
“My property isn’t a positive cash flow property any more, the sky is falling!”
But they are focusing on too small of a window.
If they look at the entire year they’ll see that even with a couple of expenses the property is still producing positive cash flow.
And here’s where things differ between beginner real estate investors and experienced ones.
Experienced investors will look at the whole picture. A 12 month period, at least.
They want their money to be working as hard a possible for them.
So they take into account things like tax deductions, depreciation and appreciation before making any decisions on whether a property is a good investment or not.
So even if the entire positive cash flow every month is eaten up they won’t consider the property a loser.
The cash flow may be zero but the ‘tax flow’ may work to their advantage.”
If you need help with determining cash flow on your next investment property, I’d be glad to help.
