In the world of real estate investing, cash flow is king, right?
Cash flow is the lifeblood of any business…haven’t you heard this before?
I can’t go broke if my cash flow is solid. Has anyone told you this before?
Well, those statements are all correct, and cash flow in real estate investing is critically important, but the unspoken truth about cash flow in real estate investing is that, much like Unicorns, it doesn’t really exist.
Why doesn’t cash flow really exist in rental real estate?
Well, the truth is that most of your cash flow will end up being re-invested into the rental property, at least in the first 10 years, thereby leaving you with no excess cash to fill your pockets at the end of the day. Take the following example;
You own a well maintained, but older house with a basement suite in it. You are generating $2500/ month from both suites, with a $1500/ month mortgage payment. Your property taxes are $200/ month, your property management fees are $250, your insurance is $150, and your average monthly maintenance bills clock in around $200. Great news, you are positive cash flowing $200 per month! This exact scenario is totally possible in Cities like Edmonton and Calgary right now.
After a year, you have $2400 sitting in your account. Things are going just great, and then BAM, the main floor tenant moves out without notice, and leaves you stuck with a vacancy for a month, plus a clean up job. You lose the $1500 in rent that he was paying, plus have to spend $500 on cleaning the place up, $1000 to repaint, and another $500 to fix everything that was broken. Hopefully you had collected a deposit that could offset a portion of this, but assuming that it was $1500 and covered the lost rental income, you would still be $2000 out of pocket for the month. Now your cash reserve is down to only $400….
This happens all too often to rental property landlords, and will quickly suck up your cash reserves.
Then on top of that, there are many other things such as;
Furnaces breaking down and requiring replacement
Water ingress causing mold and drywall damage
Hot water tanks leaking and requiring replacement
Of course this cash flow conundrum doesn’t ring true if you’re not using leverage and don’t have a mortgage charge against your property, but this is simply not reality for most people. Generally speaking, investors choose real estate as their asset of choice BECAUSE they are able to use leverage.
The truth about rental property cash flow
The moral of this story is pretty simple. Don’t plan on generating a significant amount of cash flow from your property, at least in the first 10 years. Once you have replaced a bunch of older components in your property and paid down your mortgage, cash flow will gradually improve, but be patient as it’s a long and steady road. Hot markets may allow you to see massive bumps in appreciation, but don’t bank on this and you will be well on your way to real estate investing success!
Looking for some guidance through the murky waters of investment real estate in BC or Alberta? Reach to our Property Management and Realty brokerage here.