I had my first phone consultation with a possible new year-round tax client a few months ago. They were a busy couple. The husband worked two jobs and the wife work full-time while she went to school. They had a growing family and lived in an expensive part of the country. The plan for their real estate was to create passive income so that the husband could go back to just one job.
They already had a couple of real estate investments, but the money wasn’t flowing to them. How come they weren’t rich or at least getting there?
As I started looking at their properties, though, it was pretty easy to see what one of their problems was. They had 3 properties, each of which had a negative cash flow of $500 – $1,500 per month. They were paying over $3,000 per month just to hold the properties. Reverse that negative cash flow and it wouldn’t be long until hubby could quit his job.
As we talked, I got even more excited for them. They had substantial equity in the rental properties because the properties had appreciated. We estimated that they could get about $400,000 cash in their pocket if they sold.
With a decent cash on cash return (COCR)** of just 10%, they’d have $40,000 per year of income. Considering they were losing almost $40,000 per year with their current plan, making this change would mean a net difference of $80,000.
Let’s stop there a minute. The goal was cash flow. Positive cash flow. They had cash flow before, but it was flowing FROM them. A new plan would mean cash flow flowing TO them. And with reversing the almost $40,000 per year deficit and then picking up positive cash flow on top of it meant $80,000 more cash in their pockets per year. Good news, right?
This all meant that hubby could definitely quit his second job!
I was happy to explain my plan to them.
That was puzzling. I asked if they had any concerns. The wife hemmed and hawed and then said that they didn’t want to sell these properties because they wanted to keep them for their now preschool children to have one day.
That would mean a whole lot of years with property that was costing them a lot of money to hang on to.
I had a number of thoughts, but I needed to choose my words carefully. The things I wanted to say, in rapid fire, were something like:
I thought you wanted passive income. Do you want develop something instead that your kids may or may not want anyway?
How about getting properties with positive cash flow to give them so they can decide where they want to live?
What if your kids don’t want these houses?
Do you think maybe having a less-stressed-out set of parents is worth more than a group of white elephant houses that MAY or may NOT have more value down the road?
In the end, they listened to my plan and said they were going to talk about it. They’d get back to me in a week.
They didn’t become clients. They wanted to keep those houses and didn’t feel I was on board with their goal of using their real estate investments so hubby could somehow quit his job second job while they kept feeding negative cash-flowing properties.
I was skeptical.
**The Cash on Cash Return (COCR) mentioned above is calculated by dividing the annual cash flow by the cash investment and/or current property value.
In the quick calculation I did, I assumed that you could buy properties for $400,000 out of pocket. There would likely be loans, but the loan payments then would be included when calculation the annual cash flow. They would be out of pocket just $400,000.
The annual cash flow is the gross rent less mortgage payment, HOA dues, insurance, property tax and repairs.
My husband and I shoot for a minimum of 10% COCR on our properties.
But the first thing is that you have to have cash flowing TO you and not cash flowing FROM you. That is, if your purpose is cash flow.
What do you want from your real estate investments?
That’s the first step to creating a real estate investment strategy that works. Knowing what you want.
Next comes the strategy.
Do you know what you want? Do you have a strong enough desire to make the changes you need to get where you want to go?
If we can help, drop us a note at Contact Us.