Barely going to cash flow

[EJ K.]

Hi all,

Was curious about everyone’s perspective. Moving to Indiana after previously buying a townhome in Il. It will likely cash flow 100-200 after property management fees, not as much as I would like, especially if fixes come up. We bought it last year in July with 0 down at 4.05 percent no pMI.

Would y’all keep this and just try to pay it down quickly and still have a good monthly return once the principal and interest is off the expenses?  I would probably come out on top if I sold cause I converted a loft to a third bedroom. I could also drop a large sum on it, once I get my first year under my belt at the new job and refinance to lower payments too.

I have a second property that’s cash flowing well. About 440 positive after all bills and savings for cap ex. So this could shield some of this one.

I come from a unique situation where my wife is a medical student and I am a physician. I start July as an attending and for the first 6 months won’t work extra at all, but after I get my feet wet I think I’ll go from 260 a year to 350-400k. Once she is  a resident next year she’ll add 60 k and in 4 years another 200-300 a year.

Paying out of pocket costs won’t be devastating as I could float those two mortgages and my next one (perm residence) on about 45 percent of my take home pay .

Any opinion is appreciated.

Eddie

[Llewelyn A.]

@EJ K.

Hi Edward.

I'm a financial independent Real Estate Investor in Brooklyn, NYC with a portfolio of 10 small multi-families (with partners). I have been doing this for 21 years.

I also have several Doctor friends, one that invested with me early on and one that missed the boat, and now my 2nd Doctor friend, as much as he makes, cannot afford to buy a Property here in Brooklyn anymore. He has become priced out of this market.

Both Doctor friends started to look at the way I was buying my properties with very little Cash Flow.

The 1st Doctor who became a Partner earlier on, became a millionaire.

The 2nd Doctor, completely missed the boat. He couldn't get past the lack of cash flow. He's in his 50s and wants to retire from Medicine because he is burnt out. Unfortunately, he can't but my 1st Doctor friend can.

The one thing about Cash Flowing properties I like to point out is that to me, in my humble opinion, THERE IS NO SUCH THING AS A CASH FLOWING PROPERTY..... it's the INVESTOR that cash flows the property.

Your example is actually GREAT!

You put ZERO down, and you just barely get a cash flow.

BUT... of you bought the property ALL CASH without a Mortgage... you would be CASH FLOWing that property nicely, I bet.

If you decide to self-manage it, then the cash flow would probably be awesome!

There are 2 hypothetical scenarios of your property which explains why I believe you chose NOT to Cash Flow it:

1) You put zero down and barely cash flow

2) If you paid all cash for it, it would certainly cash flow well

So, what is it? A cash flowing property or NOT?

To me, the answer is NEITHER..... it was YOU who decided NOT to cash flow the property.

HOWEVER, that's only temporary.

Like you, in my first property, I really broke even. BUT, my salary for my first property 21 years ago, was high (above $100k back in the late 90s).

I bought my property with 15% down and broke even with the cash flow. It didn't make me nervous because I could pay off the Mortgage and solve my cash flow problem.

Over time, I actually paid off the Mortgage to increase my Cash Flow so I can become financially independent.

Paying off the Mortgage to increase the Cash Flow was not a characteristic of the Property, it was a choice that I made.

From the day I paid off my Mortgage and cash flowed that property, I was financially independent.

Do I think that the property I bought with ZERO cash flow was because of the Property? NO... it was because of ME, the Investor.

If it was because of the Property, then I wouldn't be able to change the Property's cash flow.

Characteristics of a property are normally beyond something you can change. Since you can change the Cash Flow on a Property by either putting a Mortgage on it or not, we (meaning those of us that look at the financial statements very hard), realize that the Cash Flow is caused by the amount of Debt Service which is NOT part of the Operating Expenses. That's the reason why it's not, because Debt Service is a characteristic of the INVESTOR, not the Operating Expense.

Another way to think about it is that the Property Tax is an Operating Expense because if Investor A buys the property, the property tax will be exactly the same as if Investor B buys it.

BUT, if Investor A completely Mortgages the property while Investor B pays all cash, the Debt Service is dramatically changed and so does the Cash Flow of both Investors. Therefore, the Debt Service is a NON-Operating Expense which then is reflected in the cash flow.

Anyway, I think I beat this horse to death.

It's not the Property that Cash Flows, it's the Investor that Makes the property cash flow.

Something to think about.