What the Gurus aren't telling you about Cashflow....

[Sam Kwak]

The popular buzzword seems to be the “Cashflow” these days. Cashflow this and Cashflow that…

Don’t get me wrong here! I LOVE Cashflow and I fight for it everyday with all of my investments. And if you are a fan of cash-flow versus accumulation, congratulations! You’re way ahead of the game. A good percentage of today’s Americans still hold on to the adage belief of accumulating a nest egg when it is better to have a hen that lays all the eggs periodically.

But… Here’s what most gurus AREN’T telling you about creating passive cash-flow in your life. Whether that’s real estate or in a business:

TRUE CASHFLOW TAKES TIME TO BUILD

(GASP) What? It takes….TIME?!?!

Well, yes! Everything takes time to build and stabilize. In a very rare instance are you ever going to have cashflow from day one. Unless, you’re buying a premium on a business or a turn-key rental property. But you had to pay EXTRA for it. And typically, a turnkey business or real estate will also have a negative yield in your first one or two years due to the upfront premium. OR You may have bought a seller-financed notes in which you still may have temporary negative yield due to setup costs.

When you first purchase a rental property, whether that's SFR or multi-family, you are not going to experience positive cash-flow right away. In most instance, there's a "downward dip" in your yield and negative cash-flow in the first 1-2 years. The main cause of this is that you may have bought a property that had poor management from its previous owner. It takes time for a property to shake off the momentum from a poor management. Assuming that you're a great manager, it takes time to train or turn the units around with new and better tenants. Another reason may be due to repairs. In your first year or so, you may have to make repairs or upgrade any outdated maintenance items. Such as leaking toilets, outdated kitchen, broken utilities, evicting a squatter, etc.

I remember listening to all kinds of podcasts and watching YouTube videos in buying rental properties yet NO ONE talked about this. I was in a major disappointment when my first couple of rental properties didn’t cash-flow for the first 1-2 years. I had to spend extra money to make repairs, replace tenants, raise rents, and get the property at a optimal condition before I saw my first positive cash-flow. But, was it worth it? Heck yes! It created stability and the value of my property went up not only due to the repairs or upgrades but it was performing with good management.

This is also true to any business. Good management with a great leadership serving the employees or the team makes all the difference. It adds tremendous amount of value to the business and it will definitely make a positive impact on the bottom line.

The mistake that I see consistently within the real estate investing and the business world is that investors cash-out way too early. Instead of making all the necessary repairs, updates and adjustments in the beginning, they squeeze out all the cash-flow they can find without paying much attention to the condition of the property or the tenants. While this may put extra dollars into your pocket temporarily, it will have a devastating result in the long run. Same goes for a business. You can undercut your employees, your team, sacrifice the culture in order to drive more profit but ultimately you will pay through employee turnovers, slow productivity and conflict management which costs MORE money to fix.

Friends, remember this… It ALWAYS costs more to react to problems than to prevent problems early on. For example, it costs MORE money and emotional energy to repair a busted pipe during winter time than investing money to make preventive maintenance on those pipes.

This is simply a reality. Most gurus won’t tell you this nor many books will because it will burst your pipe dreams. It is counter-intuitive to what the gurus are selling you which is FAST results. Your hopes and dreams for a FAST cash-flow would be broken. But what I am telling you is real as it gets. There’s no such thing as immediate cash-flow and profit from day one. Very rare does that happen.

Here’s how you can get around this…. Ready???

You can’t… But… You can expect this happen and prepare for it. You can, however, learn as much as you can about the business to become a good steward and a manager of your investments. That’s how you set the bar in your financial success. Through accumulation of knowledge, you’re investing in yourself… The best real estate between your two ears.

Set your expectations and standards to a long term approach. Know that you’re going to play a long term game but it is going to be 100% worth it to your time and money in the future. This is why we call it an investment not a lottery ticket. 

[Costin I.]

@Sam Kwak Excellent post! 

I think many investors don't account properly for operating expenses, and the guru for sure are not going to tell you to watch for them. Here is my list of comprehensive items to account for when evaluating an investment: 

1) Mortgage

2) Mortgage insurance (PMI or MIP) or FHA Risk base

3) Property Taxes

4) City Taxes

5) HOA (Home Owner’s Association) Dues and Fees and Assessments

6) Insurance

• Property Hazard Insurance
• Flood Insurance
• Earthquake Insurance
• Umbrella Insurance

7) Vacancy Rate (usually 8% - the equivalent to one month a year, or 5-6% if multifamily and/or if experienced, if not use 8%)

8) Utilities (you’ll have some or all of these if your tenant is not covering them and/or during vacancy)

• Water § Sewer § Garbage
• Electricity
• Natural Gas
• Propane

9) General Maintenance (usually 5%)

• Upkeep § Landscaping
• Snow removal
• Repairs
• New Appliances

10) Capital Expenditures (usually 5%, higher is the property is old and obsolete, less if fully rehabbed and all mechanicals and roof are new)

11) Property Management (8%, even if you self manage, your time still has value and there might be a time when you'll want to be completely hands off or you'll not be able to do it, vacation, retirement, etc.)

• Office Supplies (e.g. stamps, envelopes)
• Software
• Gas/Mileage
• Advertising + Payroll

12) Lawyer/Law office/Legal fees

13) Accounting/Bookkeeping/CPA/Tax preparer/Tax advisor