Rental Property – How to Project Cash Flows and Returns

If you are thinking about buying some rental properties as investments, you should probably understand how to project cash flows and evaluate the investment returns you hope to achieve on your hard earned invested cash equity.

There are really two types of returns that we can earn on investment property, first is appreciation in value which is the most common hoped for return. Secondly, and much more important but generally overlooked by investors, is the cash flow picture the property will generate.

The vast majority of investors buy real estate with the hope that it will go up in value. This is really a big mistake because many properties, particularly the prize “location, location, location” properties have corresponding negative cash flows on operations that may negate any true increase in wealth from one’s long term appreciation in value.

So a savvy investor needs to look at the cash flow picture and buy properties with positive cash flows, not negative cash flows. As an example of this in Monterey, one could buy a nice condominium for $500,000, which would rent for about $2,300 per month. That rent, minus all the maintenance expenses, HOA fees, insurance, property taxes, and mortgage payment would have a deficit on cash flows of about ($1,000) per month, or ($12,000) per year.

So while a buyer is hoping some appreciation in value will earn him or her a fair rate of return, that appreciation has to additionally compensate for all the money he has to take out of his savings to cover the negative cash flows. Those negative cash flows, on this example, could span several decades and hundreds of thousands of dollars before the property turns positive.

Alternatively, there are many properties that cash flow positive from day one as an investment. A moderately priced house or condominium unit, only a few miles away from downtown in the $150,000 price range, might generate $1,200 per month in rent and positive cash flows of $225 per month. That’s $2,700 per year of positive cash flow. As a side note – the appreciation in value, over the long term, will probably be similar on both properties anyhow. So why not go for cash flow plus appreciation in value!

To calculate a cash on cash return, we divide that $2,700 positive cash flow by the cash equity we invested, maybe $40,000 on the $150,000 property for a cash on cash investment return of 6.75% on our money. And that’s a really good deal! Especially compared to the fancy prize condominium that might generate a negative (8.5%) return on our invested equity.

As a long term investor, I can assure you that positive cash flow properties, so properties that pay all the bills and provide a rate of return on your money, are much better investments than negative cash flow fancy prize properties that just drain money from your bank account. Hopefully you’ll understand this concept before you buy that prize!

Posted on 29. Nov, 2012 by Leonard Baron in Real Estate

The Advantages of Offering Month to Month Leases

While all properties are not well-suited to offering month to month leases, there are a variety of reasons why it would prove profitable for property managers to investigate the possibility of doing so. In many high profile, urban areas, or in cities where international corporations are located, month to month leases are considered a necessity. While residential communities in smaller cities and rural areas may not be a perfect fit, it may be worth investing some time into considering whether the benefits of offering month to month leases are worth the cost. Here are the reasons why properties should consider this option:

You can legitimately charge a much higher rental amount per month. Of course, your property should be located in a metropolitan area or near company headquarters; in essence any place that attracts a lot of transplants. Cities like Chicago, Boston, and Las Vegas commonly offer month to month leases at a premium price. Renters get the benefit of a conveniently located apartment community while property managers are able to charge month to month renters premium rents.

It’s a great way to attract quality, future tenants. If your month to month rentals are happy where they are, they may consider signing a lengthy lease, providing you with a reliable tenant.

It becomes easier to set up partnerships with local corporations and businesses. Local businesses are happy to direct their newly relocated employees with a safe, convenient place to live. Work out a deal that will be good for both of you.

There are some disadvantages to renting units short-term, the most potentially costly being excessive wear and tear on the short-term units. It’s also important to note that many short term renters have less of an investment in a property short-term than they do when they’re staying for a year, so the possibility of damages may increase in these units. Offering month to month rentals will create more paperwork for your office staff. Maintenance staff will also be busier with unit repairs, maintenance and cleaning.

While offering short term rentals is not a viable option for all properties, if your property is situated in a high-profile area, it may benefit your property and your bottom line to consider offering month to month rental agreements.

Posted on 03. Dec, 2012 by Mary Girsch-Bock in Business

Property Investing – Go For The Cash Flow, Not Location, Location, Location

When discussing real estate investments, we often hear people say the three most important words in real estate are location, location, location. And while “3L” properties may be some of the finest looking and most prestigious properties to own, the reality is that they are generally very poor investment choices. The reason is that the investment returns on these location properties are typically very low; and one should strive for better investment returns to compensate for the risk. The primary reason for those low returns is that A+ location properties are usually bid up to prices that are very high for the rental income and cash flows they can generate.

So where are the better cash flow properties that investors should pursue? It’s really the moderately priced, non-descript, boring location properties – whether apartments, single units, or commercial properties – that typically generate the higher cash flows and investment returns. And, higher returns, for similar risk, should be an investor’s primary goal. This is because cash flow pays the bills and excess cash flow accumulates in one’s bank account.

Let’s just think through a few numbers herein.
Moderately Priced Property – If I find an average non-descript apartment property in Southern California that sells at a realistic 6% capitalization rate (Cap Rate); that means on a $1,000,000 investment I would earn $60,000 per year (if no mortgage) and a return of 6.0% on my investment. That’s a really fair deal, and with that money I can pay the bills, put some money in reserves, and diversify the extra cash into other investments.

Fancy 3L Property – A prize property, so beach area properties, fancy areas of town, the 3L properties, are going to have very low real Cap Rates. Maybe 2.5% to 3.0%. That means on my same $1,000,000 investment, I only get $25,000 to $30,000 per year in cash flow – just half the cash flow of a moderately priced property! That may be enough to pay the bills and put away some reserves, but it’s significantly less than I’d have from a non-prize property.

Now you may think that prize properties appreciate more in value over time, but there just isn’t any long term proof that it is true. And even if it is true, that doesn’t mean it will be the same way into the future. However, the cash flows are clearly different and over long periods of time the investor collecting all that extra cash flow is virtually guaranteed to earn much more wealth on their real estate investment(s).
If you agree with the above information – and please review property listings and do some research for yourself – you might wonder why an individual would buy a very poor cash flow investment property?

There are many reasons: the buyer might not even know how bad a deal it is because they are simply buying the property in hopes that it will go up in value; without evening considering the cash flows. Also, most real estate investors have no idea how cash flows can differ based on a property’s location so it doesn’t even enter one’s mind to consider this issue. And, they may just be buying a property so they can brag about owning a prize, the “I own the nicest property in the land” and the fancy car, big house, etc. Finally, sometimes people are investing other people’s money and earning a fee on that investment; so they’re more concerned about placing investment dollars than making a smart investment.

There really are many reasons why an investor would make less than optimal decisions when purchasing property. And that is to their own financial detriment, or possibly to their investor’s detriment. But you can do better!

My guess is that if you understand the above and do your research, you’ll conclude to similar findings that those prize properties are just not the best of investments.

So to increase your affluence, find the cash flow properties that pay you more cash flow! They’re usually in the boring location, location, locations and they’ll probably provide the most long term wealth building into your future.

Posted on 15. Jul, 2013 by Leonard Baron in Real Estate

Screening Tenants Consistently for Fair Housing

Under Title VIII of the Civil Rights Act of 1968, commonly known as the Fair Housing Act (click here for Fair Housing resources), it is illegal for landlords to refuse to rent or sell a dwelling based on an applicant’s race, color, national origin, religion, sex, familial status, or disability.

Does your management company base their applicant approvals on documented evidence of an applicant’s ability to pay or not pay, or do other items factor into your decision process?
Fairness and consistency play a large role when screening tenants. It’s important to establish a set of criteria that all staff must follow starting with:

Interpreting the Credit Report
While it’s easy to quickly glance at a credit report and get a sense of an applicant’s risk, many companies look beyond just credit report numbers and consider other factors as well. Just remember that if you are willing to work with an applicant with a low credit score, you must extend that same courtesy to a similar applicant. Whatever your standards are, they must be applied to all applicants.
Income Level
While it’s more work, establishing an income level for each property provides applicants with a well-stated, easily understood rental requirement. For instance, if you rent a 1 bedroom apartment for $700.00 a month, you can establish a minimum income requirement of $2,100.00. If the applicant’s income falls below the required level, they are declined. No exceptions.

Job History
A stable job history is a vital area for property managers to evaluate. It might be helpful to establish a minimum time on the job (i.e. six months) in order to be approved. Again, this may be a tough area to remain consistent on; those new to the area will obviously not have the required time on the job, but their overall job history may indicate stability. Again, if you make an exception for one applicant, be prepared to make an exception for all.

Rental History
Past evictions, consistently late rental payments, and trashed homes in an applicant’s rental history is a cause for concern, and a legitimate basis for denying an application. But remember, these standards must be applied across the board – to all applicants, not just a select group.
Race, disability, cultural background, or familial status should play no role in the decision making process. Knowing Fair Housing Laws, you’ll protect yourself and your company by establishing a consistent screening process and adhering to it. This will ensure that all of your tenants have been qualified in a fair and consistent manner.

Posted on 05. Apr, 2011 by Mary Girsch-Bock in Best Of, Law

When Screening Applicants Remember The Fair Credit Reporting Act

Property Managers know how important it is to prevent problems with residents through careful screening procedures. The old saying, “an ounce of prevention is worth a pound of cure” is as important in today’s society as ever. That’s why experienced property managers don’t cut corners when screening applicants.

Yet there are some legal issues that landlords and all business people face when screening, and it begins at the Federal Government level with the “Fair Credit Reporting Act” (FCRA).

The latest version of the FCRA is worth reading since it also involves procedures for doing a credit and background check on employees.

The Consumer Financial Protection Act of 2010 (CFPA) is yet another set of rules and regulations that property management companies should become familiar with. There are a number of ways to get the overview for the CFPA and this link is an adequate example.

The purpose of this article is to make you aware of these federal laws, not to explain them in detail. Any kind of background check is a very good idea only if the rules and regulations are followed. Because many of the credit reporting and consumer protection laws are complex you’re likely to need help.

There are a number of online resources that can be useful to make sure your background check doesn’t violate the laws—and those laws include state and local ones. Yet like all online resources, as the song goes, “you’d better shop around.” Another option is to use a property management software solution that includes screening.

The take-away from this article is that most people who own or manage rental properties need a reputable screening services company that’s easy to work with, thorough and fast. The ones worthy of your consideration should welcome your questions and have a phone number you can call to ask a live person to give you straight answers.

Posted on 10. May, 2013 by Marc Courtenay in Best Of, Law

Tequila & Taco Music Festival Santa Cruz

The title says it all…

San Lorenzo Park – Downtown Santa Cruz,CA
Saturday, August 22, 2015 & Sunday, August 23, 2015
11:00 am-5:30 pm

The Producers of The Legendary California Beer Festival are proud to brig back the 2nd Annual Tequila & Taco Music Festival in Downtown Santa Cruz at beautiful San Lorenzo Park for an even bigger and better experience!

Join us for TWO days of fun in the sun on Saturday, August 22nd and Sunday, August 23rd! Saturday will showcase top-shelf Tequilas sampling, while you indulge on gourmet tacos! Enjoy Live Music, Margaritas, Craft Beer and Art Vendors in a picturesque park setting.

Sunday Funday is Mas Margaritas! Bring the family and enjoy a sunny summer afternoon, sipping on an assortment of Margaritas, eating delicious tacos, all while enjoying a great music lineup! There is no Tequila Sampling on Sunday.

All ticket holders both days will have access to Food Vendors, Craft Beer and Margarita Booths, and Live Music.

Tequila Sampling: 11:00 am-3:00 pm SATURDAY ONLY
All other alcohol sales will end at 5:00 pm
Live Music until 5:30 pm.
NO Tequila Sampling on Sunday.

Summer Brewer’s Dinner at Peter B’s Brewpub

What are you doing Monday night? 8/3/15

Executive Chef Jason Giles & Brewmaster, Kevin Clark have designed a summer themed Brewer’s Dinner. Set in Peter B’s new private Barrel Room, guests will experience a five course dinner for $70++ per person. To reserve your seat, call (831) 649-7874, as seating is limited.

Menu:

First Course
Hudson Valley Foie Gras Torchon
Served with a Black Pepper and Santa Rosa Plum Jam

Britney is Back Sour Ale

Second Course
Heirloom Tomato and House Made Mozzarella Salad
Sweet Basil Pesto and California Olive Ranch E.V.O.O

Peter B’s Blonde Ale

Third Course
Pancetta Wrapped Prawn’s
Served over a Guajillo Chili Jam

Peter B’s India Pale Ale

Entrée
Garlic and Thyme Cured Berkshire Pork Chop
Panzanella Salad with Rocket Arugula and Roasted Peppers
Finished with a Raspberry Demi Sauce

Imperial Red Aged in Whisky Barrel

Dessert
Trio of Seasonal Fruit Sorbets
Vanilla Tuile and Hazelnut Crumble

Reef Points Hard Cider