Cashflow Smashflow

[Brad Rondeau]

I keep hearing about cash flow and I've been beating myself up because my condo rental has only $39 cash flow each month. The property is in Laguna Niguel CA. I purchased a 3 bdrm condo for $365,000 in Dec 2009 with 20% down. I now have a 4% loan but pay $280 in HOA fees monthly. I did about $16,000 in improvements - paint, carpet, remodel kitchen, new AC etc. I lived in it for one year and then started renting in Jan 2011. I started renting at $2,175 and next month the rent will be raised another $95 to $2,340. In December 2012 I got a new 20 year 4% loan.

Two years ago the roof leaked and did $2,500 in damage to walls and ceiling. But HOA fixed roof and insurance paid for repairs, the contractor covered my deductable so there was 0 out of pocket for me. Each of the 3 years I have rented it I have had between $300 and $400 in repairs each year (usually plumber and maybe pest control).

Since I have been renting it the condo has appreiated by 30% (over $100,000). Subtract my $16000 in repairs and I have $84,000 in real appreciation. Looking at my loan - $800 in principal is being retired each month (by my tennant). If I consider $28,000 in real appreciation per year plus $9,600 principal retirement each year - then this tennant has been adding $37,600 of wealth to me each year. This is $3,133 per month - am I missing something?

I beleive my risk is managed somewhat as HOA will pay for any issues related to roof, structure, grounds etc. I beleive repairs will stay around $300-$400 per year. I put in a new AC and kitchen along with bathroom faucets etc 4 years ago so the place is solid.

Even with a reasonable appreciation of 3% per year and 3% rent increase along with $9,600 of principal retirement increase, I will add $24,900 in wealth next year ($2,075 per month). Things will get better as time goes along because with my 20 year loan, principal retirement will escalate (all paid by my tennant).

Also, my tennants are great - treat the property like it is their own, never ever late on rent etc. They can't quite afford to buy so they will likely be there for years. So I still wonder if I am missing something. If my tennants are addding $2,075 (consertive) of wealth each month how can I go wrong? There is no need for me to find excessive cash flow as my job pays all my bills and allows me to save 20% of each pay chaeck. Of course my cash flow will sky rocket in 18.5 years once my tennants pay off my loan.

[Amit M.]

@Brad Rondeau Generally, investing on the West Coast (especially CA) and other more expensive areas like NYC, Boston, etc. is very different from investing in fly over states. Most of the people giving advise above are not familiar with your market. Matter of fact, what normally works for them (cashflow focus) is counterintuitive in places like Orange County.

I think you your investment is a winner, and your perspective spot on! You brought at a good time, you have a good property in a very solid market, and it covers cashflow. You're making good money from loan pay down, and already gained substantial appreciation. It's wise to scale back future appreciation expectations, as you had a big bump the last 3 years.

I strongly disagree with those who state that appreciation means nothing until you sell, or that it can vanish at any moment. 1- an appreciated property will allow you to borrow against it, to pull cash out for another investment. 2- you brought at the bottom of a serious recession, and up already 30%. It's gonna be a cold day in hell if that condo goes back down by 30%.

You also have an investment that is a cinch to manage- fixed up, professional tenants, an expensive location. Try comparing that with 10 houses in a middling hood, with lower incomes, more wear and tear and 10x factor of things that can go wrong!

I could go on. But suffice to say that my market, San Francisco, is even more expensive and crazier than So Cal! We have rent control, nutty pro tenant/anti growth politicians, and even worse cash flow. Have you heard about the protests against the tech, or Google commuter busses here? It made national news- only in SF would (some vocal) people be against tech companies providing free shuttles to their SF based employees. It all leads to an extremely restricted housing supply and hence RE inventory is almost zero. So why are well healed investors tripping all over themselves making multiple offers on seemingly any available property? Because they became very wealthy investing here!