UNpredictable Cash Flow

[Terra Padgett]

You hear so much (I guess from the gurus and course sellers) about how “predictable” the cash flow is from rental properties. Well I adamantly disagree. You have a maintenance issue…unpredictable cash flow. Your insurance premium goes up…unpredictable cash flow. Tenant doesn’t pay their rent…unpredictable cash flow. And the list could go on. If you’re just getting started in rental properties, just beware that the cash flow is UNpredictable. 

[Randall Alan]

Quote from @Terra Padgett:

You hear so much (I guess from the gurus and course sellers) about how “predictable” the cash flow is from rental properties. Well I adamantly disagree. You have a maintenance issue…unpredictable cash flow. Your insurance premium goes up…unpredictable cash flow. Tenant doesn’t pay their rent…unpredictable cash flow. And the list could go on. If you’re just getting started in rental properties, just beware that the cash flow is UNpredictable. 

 @Terra Padgett

So I get what you are saying, but I don’t know if I totally agree with you.  If you want to nit-pick reality, I guess I could get on-board… but the general concept is that you make allowances for the things you are talking about.  I have 37 units.  I have a maintenance reserve account I fund with over $3,000 for repairs a month.  I have an escrow account that I fund with over $5,000/month to cover tax and insurance payments due across the year.    While those escrow accounts are funded from GROSS cash flow - I don’t count those escrows as a part of my income from my business.   They are really pre-paying expenses.

Maintenance issues, taxes, and insurance expenses are all expected things - and frankly they are expected to increase every year to the point I actually over fund my T&I account by about 10% to compensate for those increases.

So if we turn to rent, yes, someone can be late on their rent.  But 9 times out of 10 that is made up for within 30 days by the tenant - so cash flow for the month USUALLY is consistent for the month - but maybe not by the 5th when it is due for us.  

On rare occasions a tenant can’t - or chooses not to recover and they get evicted.  Maybe THEN you see what you hoped wouldn’t happen - that you may be out a month’s rent or so - but that is why we mention a vacancy rate when forecasting rents, right?  To say repairs and price increases imply unpredictable cash flow I think is an over statement if you are running your business right. 

Does a credit card company say their cash flow is unpredictable because of late payments and defaults and charge-offs?  No - they expect them.  They plan for them - in essence they budget for them to the point they are listed in their annual report. 

Just a little counter argument…

Randy