Last time, I talked about how important it is for you stay on track in order to meet your goals for success…
By the number of your comments and emails, my message was right on point for quite a lot of you.
Even though you’ve made yourself Market Ready, many of you still need the confidence and the determination to pull the trigger on your very first deal. I hope and expect to see this happen with you in the very near future!
But another area that I get quite a few questions about is regarding cash cows…
I find that when I talk to you, my students, about putting positive cash flowing properties in your portfolio and getting rid of negatively geared properties, there is sometimes a bit of confusion.
You see, there have been times when a property is advertised a cash cow and bought as a cash cow. But in reality, it doesn’t always turn out not to be the case. Your new “cash cow” ends up leading you to financial slaughter…
This is actually more common than you might at first think. But for the most part, there is one reason why…
FIRST TIME BUYERS’ EMOTION DRIVES THE PURCHASE RATHER THAN PROPER DUE DILIGENCE.
When this happens, you end up investing in an “income” property because it feels good to be building your portfolio. And it does feel good…but only when it’s truly a positive cash flowing property.
Don’t be an emotional cow!
Buying on emotion is an easy mistake; people do it more often than they should…which is never!
This should never happen to my students, should it?
After all, you’ve spent a considerable amount of time and preparation on course work, attending Seminars and Boot Camps…
But then, you’re also anxious to get started. You want to get your feet wet in real estate investing and…what happens?
You don’t do all of your due diligence. You don’t figure all the numbers. You end up buying the wrong property.
PLEASE don’t fall into this trap!
Use your emotions for the people you care about, such as your family and friends…Emotions have no place in a business deal or in building your investment real estate portfolio.
Always keep those two separated because emotions don’t play fairly, do they?
The whole idea behind my teaching is to prepare you for success… It works all the time and every time…but only if you follow it.
When you do, you know how to run the numbers on an income property and see if it is really positively cash flowing. Now, those numbers have to be based on realistic assumptions and verifiable facts.
For instance, are the weekly rents what the agent says they are? Even if they are, is there a special circumstance or temporary situation that made the rents as high as they are?
Check the comparable rental rates in the area. Are they in line with those numbers? Or are they at or near the very top?
If the current rent in the property is higher than average, higher than what the neighborhood can support, you must find out why that is.
Find out what relationship the seller has to the tenants. Are they related or friends? You want to be sure that the rental agreement is a true contract and not one created for the purposes of selling the property.
Assume the worst-case scenario…
Also, in the due diligence phase, get a clear idea of the area’s economy. Find out if more people are moving into the area than out and vice versa. If more people are leaving the area than moving in, you would be wise to take a step back and do more research.
You must carefully weigh the risk of investing a potentially declining area in exchange for a short-term rental gain. It’s not necessarily a deal-breaker, but find out the reason why the population shift is happening and why the rents are higher than average.
In doing so, drive around the neighborhood. Are there lots of properties for rent? For sale? Are there lots of renos, or do the properties look rundown?
Also, determine what the real, everyday rental vacancy rate is for the neighborhood and surrounding area. For instance, has a local mine shut down? A factory closed? You need to know these things to make a smart decision.
Now, when you know what the rents will actually be, that is, what the neighborhood and the surrounding area can support, use that number for your calculations. The only reason you would not would be if or unless there are overriding factors, such as the if the tenants’ rent is paid by a government funded program, for example.
But in the vast majority of cases, you want to assume the worst. If the signals are there before your eyes like flashing red lights …STOP!
The basic calculations still work, so use them!
So what do you do? You stick to what I’ve taught you! You work the numbers as I have taught you to do…
Every property may differ by at least a little bit, but these formulas will keep you in the business zone of reality and out of the emotional zone of fantasyland.
RENT: ADOPT THE RULE OF 2, where you divide the Property Cost by 1,000 and then multiply by 2 to get the weekly rental rate.
EXPENSES: Borrowed Sum multiplied by Interest Rate = Annual Interest Paid (AIP)
EXTRA COSTS: Rates, Water, Property Management = 20% of Annual Rent
NET INCOME: Annual Rent multiplied by 80%
CASH FLOW: Subtract Net Income from Annual Interest Paid (AIP)
Finally, if you’re getting into a rental property with renos in mind, get at least two estimates of costs—three is even better. Be sure to add in the additional financing costs of doing that, if any, as well.
And when you hire your contractors, get it in writing when the reno is to be finished. If you think it will take four weeks and eight weeks later you’ll still stuck with a property you can’t yet rent, you’re losing money every week, aren’t you?
If you select your cash cow wisely, with hard numbers and a good entry price, your portfolio will pay you, rather than the other way around…
And that feels really good!