Cash Flow vs Collections

[Satyam Mistry]

Like most investors I believe cash flow is a critical component of an investment. However I think that the cash flow numbers on paper can at times look so attractive that we forget about the fundamentals of the property and clientele that will be living there. 

Cash flow is critical, but not always at the cost of collections and quality. We can get too focused on the potential cash flow without considering the consistency of collections, the wear and tear of the property, the turnover, and the headaches related to operating. 

If we have a unit that can generate close to market value rent, but is not updated or a place we would want to live in ourselves then we have to consider the quality of resident that will live there. Perhaps to update the unit will require thousands of dollars out of pocket and it will take a few years to recover that investment from the higher rent value created. Instead of only looking at the ROI on that investment we can also consider the following:

• Time taken to rent the property
• Attracting a higher quality resident
• Consistently collecting rent on time
• Larger pool of interested applicants
• Durability of finishes

The time taken to rent the property is easy to overlook as we can focus on finding that one qualified applicant that will rent the unit as is rather than appealing to a wide pool of qualified applicants. The longer a property sits on market the more it is costing both in expenses and lost rent. 

I consider a higher quality resident to be one that is excited to live in such an attractive unit, is financially stable, has an excellent payment history, has pride of ownership, and is honest. 

This ties into the saying that it is better to wait for a qualified applicant rather than fill the unit with anyone who is interested that has the deposit and first month's rent. If our unit is sitting on market for too long with not much interest from qualified applicants we can look not just at the price, but also the finishes and appeal of the property itself. 

I like to look at properties not solely from the cash flow and return on investment, but also from the collection and quality standpoint. When thousands of dollars are going into updating a cosmetically older unit those upgrades should also last for many years and be easier to maintain through turnover as you are thinking not just about what looks nice, but what will hold up well over the years.

I'm interested to hear others thoughts, comments, & questions.