Historical cash flow analysis

[Rich Cavanagh]

I'm a pretty conservative long term buy and hold rental investor focused on cash flow. My thought process thus far has been to buy safe and smart so a good looking property I buy now isn't easily put into the red once the market turns and rent drops.

For example, I aim for $150+ cash flow / month (SF currently). I generally use zillow to see the 10+ year rent historical so I can have a reference for the worst case scenario. With one property it's a range from $650 (in 2013) to ~$900 (current). That can mean either great CF or leave me in a place where I'm scrambling to offload a property at the bottom of a buyers market.

I just wanted to pick the brains of the more seasoned veterans who have been through multiple ups and downs in the market over the years.

1. Do your reference this older data when doing your homework?

2. How much value you do you place in old rent historical given that there is obviously inflation etc.

Of course none of us has a crystal ball and rent can always come crashing back down with the change of tides... but I figured i'd start up a discussion.

[Llewelyn A.]

@Rich Cavanagh

Hi Rich,

I think because a lot of people don't really do a projection of Rents and Expenses, they don't really know that if your Expenses INCREASE MORE than your RENT, you can still wind up Increasing your Cash Flow.

Look at this example spreadsheet as an example:

The Gross Rent is only increasing by 3% annually for 10 years.

The Expenses are increasing by 5% per year for 10 years.

BUT, because the Gross Rents are so much higher than the Expenses, about 5 times higher, a small increase in Gross Rents is larger than a "Larger Increase in Expenses."

It seems counter-intuitive until you do the math and experience it yourself.

This is one of many reasons why I invest in Brooklyn, NYC. Very HIGH Gross Rents versus the expenses and rents move up significantly every year.

In most of my properties, we typically raise rents above expenses. But when I do my projections, I always assume the increase in Expenses will be higher than the increases in Rents.

Therefore, in my particular calculations, it is always very conservative.

Also note that even if my Mortgage payment throws me negative in the 1st year and EVEN if the Expense Increases are higher than my Gross Rent Increases, I will still get increasing cash flow.

Given this scenario, you will not that I start out NEGATIVE $133 per month but wind up POSTIVE $1,684 per month.

AMAZING when you do the 10 year projections and doubly amazing when you actually put it in practice over 10 years.

Keep in mind this is COMPLETELY COUNTER-INTUITIVE and yet it's all about the Math.

Again, most people (probably 90% or more) will not realize the effects of this until they do the Math....... I cannot preach any stronger how Math really helps. Too many of the Guru classes just do simple math. But by expanding our Math Knowledge, it really shines light on the subject.