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Is Cash Flow King?

2ndstory

2ndstory

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Jan 26, 2010
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Just sold a renovation project so I`m looking to pick up some more properties, most likely in Winnipeg where I live. Right now, in Winnipeg, we have a sellers` market. Case in point, I listed my house for $209 000 and sold it last week for $223 000. Bidding wars are not uncommon and pretty much guaranteed for reasonably priced solid houses in good areas.It seems that there are two types of house to buy, rent, and hold here in the city.

Type A: Nice house in nice neighbourhood

Pros: good tenants, value of home increases steadily, easy to liquidate
Cons: expensive, taxes higher, cash flow is low

Type B: Ok house, poorer neighbourhood

Pros: affordable, low taxes, good cash flow
Cons: riskier tenants, home value increases slowly, exit more difficult

Presented with these options, as an investor, where would you focus? Why?

Nik
 
QUOTE (2ndstory @ May 25 2010, 01:03 PM) Just sold a renovation project so I`m looking to pick up some more properties, most likely in Winnipeg where I live. Right now, in Winnipeg, we have a sellers` market. Case in point, I listed my house for $209 000 and sold it last week for $223 000. Bidding wars are not uncommon and pretty much guaranteed for reasonably priced solid houses in good areas.It seems that there are two types of house to buy, rent, and hold here in the city.

Type A: Nice house in nice neighbourhood

Pros: good tenants, value of home increases steadily, easy to liquidate
Cons: expensive, taxes higher, cash flow is low

Type B: Ok house, poorer neighbourhood

Pros: affordable, low taxes, good cash flow
Cons: riskier tenants, home value increases slowly, exit more difficult

Presented with these options, as an investor, where would you focus? Why?

Nik

You`ll get more meaningful answers to this if you provide approximate numbers for the two options you are considering.

Regards,

Michael
 
I don`t think that those are your only two options. You essentially pointed out two points on each end of a continuum. There are certainly some areas that cashflow well without being in the North End core. Certain areas of elmwood, the north north end (ie inkster) and weston are areas where you can still buy affordable homes and attract decent tenants.
 
QUOTE (fumbrunner @ May 25 2010, 02:50 PM) I don`t think that those are your only two options. You essentially pointed out two points on each end of a continuum. There are certainly some areas that cashflow well without being in the North End core. Certain areas of elmwood, the north north end (ie inkster) and weston are areas where you can still buy affordable homes and attract decent tenants.

Good points. I guess I`m wondering which way to lean. Less cash flow stronger properties, or better cash flow weaker properties?

Nik
 
I don`t know the area at all but overall, if it cash flows even low in the good area, I would buy there. BUT, it depends on one thing. DO YOU NEED the cash flow and if so, HOW MUCH do you need? That should determine if you buy in A or B.

For me, if a property is in A like you describe, it fits my strategy and allows for an easier exit with greater appreciation possibilities.

Just wanted to chime in
 
QUOTE (2ndstory @ May 25 2010, 02:55 PM) Good points. I guess I`m wondering which way to lean. Less cash flow stronger properties, or better cash flow weaker properties?

Nik


For me, value for money and cashflow is important. It helps to finance additional properties. As you mentioned, it`s a seller`s market right now. Who knows how long this crazy appreciation in winnipeg will last. Be careful buying a low cashflow property at the height of a bubble. It`s a long way down.
 
Nik, what is your long-term goal for your r.e. investment? Which type of property gets you closer to that goal?
 
I vote for better cash flow, middle rent price, middle range properties. You don`t want to buy in a horrible area, realistically these properties are not good cash flow properties anyways, too much turnover and too much vacancy, you may have to leave it empty for a few months waiting for the rare good tenant who needs to rent in the area.

You want to be in the middle range of rental prices, this segment of the market rents the best. People in the very high end are extremely picky and they are few and far between.

You need the cash flow to pay for the long term upgrades and maintenance your property will need and I have heard way too many owners tell me if you don`t get this rented this month I`m not sure how I`ll pay the mortgage. You need a healthy back up fund for your property for exactly these types of situations. It is 100% sure that if you have a few properties you will eventually deal with damages, bad tenants, and vacancy so you might as well be prepared.

It is just smart to pick a property at the edge of an area that is getting better and just wait for that. A property that needs minor upgrades is also good because you can then raise the rents a little bit. New countertops, a reglazed bathtub, new paint are all pretty easy fixes for a less than ideal apartment. The best thing is that you can do this as the tenants turn around. This way your suites are continually improving, try and do a little improvement at every turnover.
 
It will depend more on the investor as it is just the age old question when it comes to investing. How much risk are you willing to take and how much return do you expect?

presumably the more expensive property should be less risk due to better condition and attract more and better tenants due to location.

But if your `safe` property doesn`t provide returns at least as good as your investors can get in more traditional investments - like mutuals or REIT shares they won`t come looking.

If your poor property attracts an investor right away but two weeks in you are looking at an eviction you wont` be happy either. Like the posters above I think you need a happy medium.

That being said - I personally choose less cash flow for better property any time I face this decision.
 
QUOTE (2ndstory @ May 25 2010, 01:03 PM) ..Presented with these options, as an investor, where would you focus? Why?
Either option works if the price is right .. bad area / poorer property obviously has to be much cheaper to compensate for it .. and is often far more work intensive .. but this is where you start usually (or I did anyway) as this is were you find properties with great upside, less money (or no money) down and a lot of hard work that pays off in a shorter time frame.

Once you have more money, and value your time more, you will then gravitate to the better areas/better homes with more money down, less cash-flow and less immediate upside .. but you also have less headaches !
 
QUOTE (ThomasBeyer @ May 25 2010, 09:38 PM) Either option works if the price is right .. bad area / poorer property obviously has to be much cheaper to compensate for it .. and is often far more work intensive .. but this is where you start usually (or I did anyway) as this is were you find properties with great upside, less money (or no money) down and a lot of hard work that pays off in a shorter time frame.

Once you have more money, and value your time more, you will then gravitate to the better areas/better homes with more money down, less cash-flow and less immediate upside .. but you also have less headaches !

That is what I am wondering about. My agent who I work with closely and has been in the business for 25 years plus encourages me to purchase buildings in strong areas. In Winnipeg that means Crescentwood, Wolseley, River Heights, Riverview, St. Boniface. All these areas demand are older mature areas with houses ranging from 50 to 100 years old. They have been kept up well and have experienced the greatest increase in value over the years as compared to the rest of the city. They are attractive to families in the middle to upper income range.

I am trying to decide whether to focus only on properties in this area or look elsewhere too. If I focus on these areas, I will be purchasing less properties and most likely purchase at market value, but rarely less. If I look at the mid range to lower end areas, I can purchase more properties, but history has shown that the equity gains there are less and there are the issues of renting to the types of tenants that you get in those areas.

So... I can either slowly build my portfolio of high end properties with little cash flow and possibly a larger pay off in the future, or build my portfolio more quickly with mid to lower end properties and better cash flow, but less appreciation. Trying to decide which way to go.

Nik
 
QUOTE (2ndstory @ May 26 2010, 09:26 AM) So... I can either slowly build my portfolio of high end properties with little cash flow and possibly a larger pay off in the future, or build my portfolio more quickly with mid to lower end properties and better cash flow, but less appreciation. Trying to decide which way to go.

Nik

Remember that if you buy in some of the areas I mentioned above, you can usually pick up a place that needs a bit of work. Fix it up, and there is your equity increase. I bought a duplex earlier this year in elmwood for 135K, put in 10K in renos (not counting my labour) and refinanced for 175K. There are alot of opportunities.
 
QUOTE (2ndstory @ May 26 2010, 08:26 AM) ...

So... I can either slowly build my portfolio of high end properties with little cash flow and possibly a larger pay off in the future, or build my portfolio more quickly with mid to lower end properties and better cash flow, but less appreciation. Trying to decide which way to go.
What is better: red wine or white ?
BMW or Mercedes ?
Male or Female ?
Alberta or BC ?
Fish or Steak ?


.. both have pro`s and con`s .. and as stated above: nicer houses/areas are more enjoyable to own, but cost more, cash-flow poorer and thus build wealth slower ! Poorer areas need far more work, but can be bought with low (to sometime no initial) cash, and appreciation / improvements can be done much quicker. i.e. buy 3-4 older houses for 80K and sell for 120K each with 10K down each in bad areas of town .. for a higher cash-on-cash ROI than buying at 260K nice home with 50K down and sell for 300K ..

both strategies work ..

and you can do both in parallel btw !
 
QUOTE (ThomasBeyer @ May 26 2010, 11:06 AM) What is better: red wine or white ?BMW or Mercedes ?
Male or Female ?
Alberta or BC ?
Fish or Steak ?


.. both have pro`s and con`s .. and as stated above: nicer houses/areas are more enjoyable to own, but cost more, cash-flow poorer and thus build wealth slower ! Poorer areas need far more work, but appreciation / improvements can be done much quicker. i.e. buy 3-4 older houses for 80K and sell for 120K each with 10K down each in bad areas of town .. for a higher cash-on-cash ROI than buying at 260K nice home with 50K down and sell for 300K .. both strategies work .. and you can do both in parallel btw !


True enough. BTW, my preferences would be red, BMW, female, BC, and steak from AB.


Thanks Thomas, and others for input. The tough part about doing this here in MB is rent control as well. If I buy a revenue property that needs some work and put some money into it, refinance, I cannot just raise the rent to maintain cashflow. This year I was allowed to raise my rents a whopping 1%! You know how long that is to just recoup the cost on one window or a new toilet? But, that`s another issue.

I may start looking at some midrange properties as well as some commerical to add to the portfolio. Commercial is usually more money and larger downpayments but there are not any rent control restrictions.

Nik
 
QUOTE (ThomasBeyer @ May 25 2010, 08:38 PM) Either option works if the price is right .. bad area / poorer property obviously has to be much cheaper to compensate for it .. and is often far more work intensive .. but this is where you start usually (or I did anyway) as this is were you find properties with great upside, less money (or no money) down and a lot of hard work that pays off in a shorter time frame.

Once you have more money, and value your time more, you will then gravitate to the better areas/better homes with more money down, less cash-flow and less immediate upside .. but you also have less headaches !


Yes I agree with Thomas. I also started out with a property in a bad area because it was easier to get into the market and from that I was able to steadily increase the number of properties I own over a three year period ! This being said I haven`t ever had a problem with my tenants thus far !
 
QUOTE (2ndstory @ May 26 2010, 11:18 AM) True enough. BTW, my preferences would be red, BMW, female, BC, and steak from AB.


Thanks Thomas, and others for input. The tough part about doing this here in MB is rent control as well. If I buy a revenue property that needs some work and put some money into it, refinance, I cannot just raise the rent to maintain cashflow. This year I was allowed to raise my rents a whopping 1%! You know how long that is to just recoup the cost on one window or a new toilet? But, that`s another issue.


Nik

Yes, you can increase rents. Take a look at the RTB policies. Landlords are free to set the rent at whatever rate they want for 3-plex and under if they are vacant. If you will be doing substantial renovations, you can give existing tenants 3 months notice and then do the renovations. After you are done, set it at whatever rent you want. I have done it a number of times. BTW, for me substantial renovations also include seperating out the heat so that I dont pay heat in the winter. That duplex I referred to is now rented at 700 per suite with heat and hydro being the tenant`s responsibility. 500/mth cashflow with essentially 0 down. :-) There is talk of closing this rent increase "loophole" but it hasn`t been closed yet.
 
QUOTE (fumbrunner @ May 26 2010, 01:21 PM) Yes, you can increase rents. Take a look at the RTB policies. Landlords are free to set the rent at whatever rate they want for 3-plex and under if they are vacant. If you will be doing substantial renovations, you can give existing tenants 3 months notice and then do the renovations. After you are done, set it at whatever rent you want. I have done it a number of times. BTW, for me substantial renovations also include seperating out the heat so that I dont pay heat in the winter. That duplex I referred to is now rented at 700 per suite with heat and hydro being the tenant`s responsibility. 500/mth cashflow with essentially 0 down. :-) There is talk of closing this rent increase "loophole" but it hasn`t been closed yet.

Good info "fumbrunner". Most of experience has been with my 4-plex. Separating out the heat etc is a great idea, especially since many of the duplexes I run into are not true duplexes. Is Hydro pretty good to deal with in those situations?

Funny since I posted this thread, these guys wrote this article.


http://www.renegaderealestateblog.com/mayb...in-real-estate/

Nik
 
Gerry, "fumbrunner", for some reason I can`t pm on this forum. I may have some Winnipeg-related questions for you. If you are willing, could you give me your email? Mine`s nfast@mts.net.

Thanks.

Nik
 
Hi Nik,
Speaking from my own experience, i can say for me it has been good to have a mix. i had a property on clarence and one on River rd St.vital and a bunch in and around weston are with a couple in the north end.

This has provide me with great flexibility.... Although i will say i bought a house 6 years ago for 23k on the 1500 block of clarence and could sell that house today for 90k all the while i have been getting great cash flow as well.....so there are areas that many investors stay away from as gerry has suggested that are very profitable either way..... especially on the re-finance side again as Gerry suggested.

Many of our other clients though stick to the high end houses as well.....i think it`s more of a comfort level and risk taking level.....the houses i bought in the north end were risky until after i bought my first one and made good coin off it, now im not scared of the north end at all.....but i still like my mix.... if nothing else for the flexibility.

Hope that helps

Cheers

Jake
 
QUOTE (2ndstory @ May 25 2010, 12:03 PM) Is Cash Flow King?

If it was an IQ test my answer would be: "like cash is queen".
 
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