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Jonathan Cook: [00:00:00] On today's episode of The Investing Revolution, we're going to talk about cash flow. We're going to open up a spreadsheet. We're going to dive into it. We're going to talk about how to find a cash flowing property and how to keep it making you money every month.
Speaker2: [00:00:15] This is the Investing Revolution, a podcast designed to help your real estate investment strategy. On this podcast, we'll teach you the actionable steps to take and pitfalls to avoid so that your real estate investing can thrive.
Jonathan Cook: [00:00:29] Welcome to the investing revolution. I am your host, Jonathan Cook, and with me is my great friend, Christine Bennett, my co-host.
Christine Bennett: [00:00:37] Hi, guys. Hey, Christine. So we're talking about the thing today.
Jonathan Cook: [00:00:41] What are we talking about? Well, there's a lot of things, Christine.
Christine Bennett: [00:00:44] Oh, I know.
Jonathan Cook: [00:00:45] Are we talking about the big thing?
Christine Bennett: [00:00:46] We're talking about the big thing.
Jonathan Cook: [00:00:48] That's just got. So what? I'm.
Christine Bennett: [00:00:51] So, of course, we're talking.
Jonathan Cook: [00:00:52] About cash flow.
Christine Bennett: [00:00:53] It's like my one of my favorite things.
Jonathan Cook: [00:00:55] You know, I think that I know that we schedule these episodes and we plan them out well. But before we.
Christine Bennett: [00:00:59] Talk about the thing is, is this is the.
Jonathan cook: [00:01:02] Magic. Yeah. And I know it is it is the thing. I feel like every every episode that we've done so far is ultimately been leading to this. Right? This is this is like big number one. I've got a spreadsheet out. I'm looking at the spreadsheet. You have this same spreadsheet out we're actually going to talk about. We're going to we're going to Deep Dive. We're going to get literally Excel spreadsheet granular and talk about finding a cash flow in property, building a cash flow in property, making sure that your property is actually cash flowing and how much that cash flow can mean. Does that sound right to you? So what we're going to do.
Christine Bennett: [00:01:40] Yeah. Yes, that's what we're going to do today. We're going to mind blow.
Jonathan Cook: [00:01:45] Let's get into it. So real quick let's give a quick overview. When we say cash flow, we mean the amount of monthly income your rental property is bringing in after expenses. How many expenses are there, Christine? Is it is it just your mortgage?
Christine Bennett: [00:02:05] No, baby. It's a little bit more than that. It's a lot. A bit more than that.
Jonathan Cook: [00:02:09] Yeah. It's there's there's ways to calculate this before you purchase a property to make sure that what you're buying and what you're trying to fit in a cash flow model strategy actually is there because you can buy a lot of properties that that have some cash flow, but that's not optimizing a cash flow property strategy. We're talking about optimizing this in a way that that you're bringing in major cash flow. We're talking about a 21% cash on cash return. That's what we're talking about here. And at least this example spreadsheet that we have pulled up, which is actually based on a real property. So this spreadsheet that I have done was an example that actually you and I had been discussing this when we were talking about some of our own investments. Right? Like the purpose of this is where do we find properties? Where can we go and look and build this model with major returns for our investors and can can show them a like ideal version of what this is. And this was one of the one of the properties that I had come up with. This one isn't it's definitely not the best one. I literally targeted this one because it is the median in the area where it was at the time. It was not the best option. It was like, so if we optimize how the strategy works, you can even take this property, which I mean, the address doesn't really matter. But the idea is this was a $150,000 property that is essentially rent ready at the moment. It probably needs some paint, it probably needs a little bit of flooring, some carpets and stuff like that. But it would be cash flowing if you bought it. Right now, this is a turnkey property. Basically, this this address, this spreadsheet represents buying a property that is rent ready right now and is a cash flow property.
Christine Bennett: [00:04:27] Cash flow positive?
Jonathan Cook: [00:04:28] Yeah. Oh, God. Yes. Because you can have negative cash flow, but that's not what we're talking about today. So in in a property like this, Christine, where what is. All right. We've talked about C class properties in a previous episode to me and now this is just my opinion on this. I seem to find significantly more cash flow optimized properties in this kind of lower income C class area. And there's been a lot of work going on in the area. There's been a lot of people that have been putting some work and some flips into some of these areas and that's in it's representative in that those median price ranges rising up and the rent price is rising up. Right.
Christine Bennett: [00:05:15] Also the appreciation.
Jonathan Cook: [00:05:16] Yeah, absolutely. And so what we're able to do in the in these areas is purchase. And you know what? Let's let's not beat around the bush. I mean, this property was in Griffin. This is Griffin, Georgia. So Griffin is I mean, less than 15 minutes away from where we're sitting right now in the podcast studio. It's just down the road from us. We were talking about in south Georgia or South Atlanta, not south Georgia, south the south Atlanta metro. Griffin is a really cute little town. It's it's an older area. The homes in that area are all built, you know, in the thirties, forties, fifties era. You know, they have a very similar look. You know, it's it's all those small would you call that cottage style or would you call that like a bungalow?
Christine Bennett: [00:06:07] I would say bungalow. I think the key here is 15, 15 minutes from where we are, but 30, 45 minutes from Atlanta. Atlanta, yeah. I mean, that's this is the true this is a true secondary market. This is just far enough to where it makes rental rental properties affordable for people. This is this is basically the a prime example of how you can you can find something in this market right now that is cash flow positive. Yeah, absolutely. So I want to go back, though, because I think I think our listeners really need to understand how simple this is, how simple the process is. So, Jonathan, you geeked out. Let's go over. Let's go over gross, gross monthly rent. What does that number look like for this property?
Jonathan Cook: [00:07:08] So, all right. The gross monthly rent on this property is 1100. So and the way I calculated that, I mean, it's there's no one direct way to find a rental value because just like any other market, it's what someone will pay for it. Right? So this area has rental properties in it reaching 1800 dollars a month in a few cases. That's not prototypical. It's pretty rare that you see something like that. But but the top of the market reaches around 1800. Now, 100 also isn't the cheapest. 100 is right along with the median. I mean, this year alone, there have probably been maybe a dozen or so properties in this little small town alone that have rented between 1012 hundred dollars right there. That that $100 is kind of that little sweet spot. And they definitely range in quality that the ones on the less expensive side are two bedroom instead of three. They are carpet instead of lvp.
Christine Bennett: [00:08:16] Lower and finishing.
Jonathan Cook: [00:08:18] Finishings. But the higher up you go, the 1800 dollars a month property that was like a completely refurbished refinished like looked like a a era appropriate complete rehabilitation. It was beautiful. And actually just slightly north of these areas are some new brand new construction homes, too. And so those are renting, you know, upwards, 1800 and up. So that's what's bringing in the rents and that's what's driving those rents up, along with the fact that we have several investors that that are entertaining that area and creating good, high quality products which are slowly rising. The rents not over that $1,500 a month range, but it's taking those eight and $900 a month properties and there's just less of those for sure. But because there are much fewer properties that are in as distressed and I don't mean distressed, I mean just in as low quality as possible. So it's just bringing in more money and stuff like that. But what's crazy is like when you look at buying a bunch of investment properties, are you looking at the economic drivers, things like that, and you're like, oh, what is Griffin have in an industry wise? There's a lot of retail and stuff like that, but it's close to Atlanta, but it's not in Atlanta and there's tons of stuff in the Atlanta area that these people could work at. People in the Southeast don't mind driving 30 to 45 minutes for work.
Christine Bennett: [00:09:51] And this is why you're going to see so many secondary markets that have a ton of properties like this. They're just far enough, just close enough. And so we won't get the address, but we're talking about the gross rents. What does it cost to actually run this property? Let's let's let's really dive in.
Jonathan Cook: [00:10:11] Okay. So I don't want to jump into the first month. I mean, I have our our management fees attached to this. We're just going to run into just like month, month three, month two. It doesn't really matter. It's a good example. So management fees on this $100 month property is going to run you 77 bucks at the moment. I mean, our management fees are 7%. That's what ours are. Maintenance. I'm going to finish with maintenance. Is that okay? I'm going to skip that. Yes, sell. At the moment we're going to look at taxes. So taxes on this property annual. Lilly or $982. You do pay that all at once. You don't pay that monthly, but you need to divide that out monthly to truly calculate your monthly cash flow. So when you divide that out, it's $165.17. That is that should be viewed as a monthly expense your insurance. So I was using average insurance pricing in the area based on square footage. The annual insurance for this property is $626 and no sense on that one, which that divides up to $52.17 a month. And again, some people pay that annually, some people can pay that monthly. It depends on what your structure is and it can go up and down.
Christine Bennett: [00:11:33] So I want to skip over the vacancy. Okay. For the moment, I.
Jonathan Cook: [00:11:39] Want to jump down to the.
Christine Bennett: [00:11:40] Jump to jump to loan and we'll talk about what debt services.
Jonathan Cook: [00:11:43] And so the debt service the loan that's that's your principal and interest based on a in this case, it was on a three and a half percent rate, which is I know that that's changing. And depending on when you hear this episode, it may be vastly different. But at the moment when this was calculated, it was at about three and one half percent. And a mortgage on this $149,000 house with a 20% down payment was $542. That's super, super that's principal and interest. That's that's a pretty good monthly payment for bringing in $100. Now, are we bringing in or is your cash flow $600 a month now? Of course it's not. Is it $500 a month? No. You have to calculate all that in there. And if you're not calculating all of these, there's the reason that I break it down monthly, even for things that you pay annually. There's a reason. And I'm going to get into talk about vacancy. Do you want to talk about loan first? So vacancy or maintenance?
Christine Bennett: [00:12:44] So I think we should.
Jonathan cook: [00:12:44] There's a reason that I have them calculated the way that I do.
Christine Bennett: [00:12:47] Yes. I think we should talk about let's talk about maintenance. Let's talk about what the expectation for a property like this should be for maintenance and why we chose that number.
Jonathan Cook: [00:12:57] Okay. So I have an annualized maintenance fee on this property or maintenance cost on this property annually at $602.80. That is the actual annualized number. Does that mean you're spending 600 and some odd dollars, $602 every single year maintenance? No, I mean, that breaks down to $50.23 a month. Which does that cover? I mean, even like a service charge? Not really. But why did I come up with $602.80? So there is a lot of calculation to this. It's based on the square footage is one of the biggest issues, to be perfectly honest. And I know when you think real estate, you know, good real estate, you're like, oh, what's the most square footage I can get the most for rent for that? And while that can be true, if you own a rental investment square footage can sometimes be the enemy. Because if you have to paint the entire thing and you have 4500 square feet, that's going to be a whole lot easier on your wallet than if it's 3000 square feet. Right.
Christine Bennett: [00:14:08] This is why it's so important to plug these numbers in from the beginning. And actually, I would even argue this is something you should be doing every year. You should really sit down and look at your portfolio, look at how the property is performing, look at what you actually spent in maintenance, because we deal with this all the time. Yeah, we do. You know, owner calls. Oh, my goodness. I just spent X amount of dollars on this repair. I'm like, Oh, okay. So how much did you budget for? What do you mean budget exactly?
Jonathan Cook: [00:14:38] And that's why we keep preserves for certain people. But you're absolutely right. If you're not planning for it, then when it hits you, it's like, oh, it's shocking. It's it hurts me. It's the same thing that we talked when when we were discussing, like, roofs and stuff like that. In the long term, buy and hold. You have to plan for these things. Things are going to you own this property and you're going to have to handle regular maintenance. These properties aren't going to last forever. Nothing, nothing in a in a property is going to last forever. Everything has a shelf life. Everything has a half life. We talked about paint, paint in general. Even if you have good quality paint, that's going to at most, if nobody is scratching and or baiting it up, it's going to last you about seven years. Flooring probably actually a little bit less than that if it's carpet.
Christine Bennett: [00:15:27] So real quick. So everyone kind of understands where we get these numbers because I know it feels or sounds arbitrary sometimes. So the what Jonathan was just talking about was the the notion of useful life. How long do these things last? So it's one of those concepts that we share with the insurance industry we're just trying to gauge. How to prepare these numbers.
Jonathan Cook: [00:15:52] Absolutely. And it factors into security deposits.
Christine Bennett: [00:15:56] Absolutely.
Jonathan Cook: [00:15:56] So when I calculate a monthly maintenance cost or even just the annualized maintenance cost, it's not how much would it cost to repaint this house and redo the floor. And if that needs to be. And what if the HVAC goes out and what if there's plumbing issues? It's not that it is. You calculate a turn cost and average out. How much is a turn actually going to cost on this property? If your average lifespan on a tenant is three years, which that's what ours is, how much is it going to cost to turn this property repaint red carpet? The thing, there's a number there and then you add in additional maintenance costs on top of that for likely issues like your plumbing and little things like that. And there's an annualized actual percentage number that we use for that as well. We add it all together, divide it by three, now it's annualize. Then guess what? Then after you do that, divide it by 12, there's your monthly main to die.
Christine Bennett: [00:16:56] Da So you're going to find to a lot of professional investors or investors who have a larger portfolio, it is not uncommon for them to take that guesstimate. It's an educated guesstimate of how much is going to cause. It's not uncommon to put that in a separate reserve, and it's actually pretty smart to do that because you don't have to worry about it when it hits you. It doesn't really affect your actual cash flow numbers and you have a little piggy bank.
Jonathan Cook: [00:17:27] And to be perfectly honest, when I am discussing an investment analysis with a client, that's the reason that I show it monthly. This is the reason that I show these things monthly to allow them to plan and take a reserve. Every time you make you get this $100 payment, you've got to take all these things out. Even though you haven't paid $50.23 in maintenance this month, go ahead and set it aside. Maybe it hasn't cost you that yet, but eventually you're going to have to use it. Set it aside for a second. Go ahead and put it in a reserve account. That's it's not hard to set those up, but they are absolutely invaluable when you have them there because that's going to save you for when the inevitable the sink is leaking well, the sink is going to a leaking sink is probably going to cost you more than 50 bucks. So let's be real. We've got to send somebody out there. They're going to do some work and it's going to cost 120, 180, 200 bucks. Some some number. They're going to come back with whatever fix they have. Okay. Well, if you've got four months saved up, guess what? No worry. There's I mean, you're prepared for it.
Christine Bennett: [00:18:39] So shameless plug. This is obviously why I think it's important in property management company because vendors, contractors, they know that we generally require or prefer to have cash on hand for an owner or for a portfolio that gives us the ability to get better rates, you know, get better quality vendors. It's simply because we are reserving some of their funds so that you don't have to worry about, oh, how are we going to get paid? It's already there.
Jonathan Cook: [00:19:13] And aside from that, just to kind of piggyback on why it's important to have a property manager is the reason that our general contractors, aside from those reasons that Christine was saying, one of the other reasons that they give us good rates is because we give them a ton of business, of course. Absolutely. So that's how I calculate maintenance.
Christine Bennett: [00:19:33] Do you want to talk about vacancy? Yes. Let's go to this.
Jonathan Cook: [00:19:36] So vacancy that I have calculated in this. Let's see what is my actual vacancy cost? And it's $550. What is $540 come from? It's based on average days of market to done easy it's simple it is unbelievably simple. So days on market is the time that we are marketing your property. That is, we have put a for rent sign in the yard, which we don't actually do. We put them on the internet because nobody looks at signs and yards anymore. So it is being marketed on your Zillow's and all your other stuff. How long is it going to take from the day that it hits the Internet to the day that someone is in the property in this area? The median days on market time frame is 15 days. Our median time a market is nine right now as a company. But when I'm calculating this for an investor, I'm going to calculate it based on market statistics, not just our performance, because realistically, even these maintenance costs, we could probably bring them down a little bit because I know we can get it a little bit cheaper than this. So I average these out based on market information for the most part. What I'm looking at that vacancy, if it's going to take 15 days to. Well, then you lose half of a month's rent. That's $550. There you go. There's your math. So and that's a real hard loss, right?
Christine Bennett: [00:20:59] It is real money. That is is. No, you have no way of.
Jonathan Cook: [00:21:02] Opportunity.
Christine Bennett: [00:21:03] Loss. Exactly. So when you're looking at these numbers, it's really important to watch over the variable expenses. Those variable expenses are the two we just talked about. That is how long is this property going to sit on the market without having a tenant or having making money, being productive? How much are we going to spend on maintenance? And maintenance is we're going to do an entire show on maintenance specifically. But the better you plan for it and the better you anticipate it, you're going to be in a lot better situation.
Jonathan Cook: [00:21:39] Absolutely. And that's exactly right. You've got to plan for realistic numbers. If you are planning on some arbitrary number that someone told you on some article that you read or some whatever, it doesn't matter what it is. If someone told.
Christine Bennett: [00:21:56] You, we're not planning at all.
Jonathan Cook: [00:21:57] We're not planning at all. And then you start getting these expenses, I mean, and you're like, Well, it's written for $100 a month. I was hoping to get $500 a month cash flow. Well, you have made a mistake from the start. There's no way I can overcome that. Even if I cut my maintenance cost to zero, even if I lease it in the day that it is available, those are the only actual variable expenses. Hey, guess what? How much cash flow are you making difference from that? So that's $100 better. You're not near 500 because the actual the monthly cash flow in this $167.50, which that's not a crazy number. But also this is a super low investment you're spending. You're actually coming out of pocket some 30,000. Like that's where the down payment and actually spending almost three grand on making it truly rent ready. That's not a.
Christine Bennett: [00:22:52] Lot. It is not.
Jonathan Cook: [00:22:53] And you're making back $167 a month. That's really good cash flow. There's your 21% cash on cash return after three years. It's a major number like it's some big dollar bills. Right. And if I cut it, if I add 100 to that, now you're to 67, actually, because it's not 100, it's 45 and 50. So it's not it's $95. But let's say you add $100 back into that with your variable expenses. Are you to 500? No, you're not even close. You're halfway there. It's and that's why it's important to calculate these numbers, to get a realistic idea of what this is supposed to be before you buy it.
Christine Bennett: [00:23:36] So this right here is what separates the what the investor who has one, two, three, four properties from the investors, who have hundreds of properties. And it really has it has very little to do with where do they find the funding? Where do they get the money? How did how did this happen? It's this right here. It's looking at what you can actually make on a realistic scale from each property. And this is this is where you see successful growth in a portfolio. You see the positive cash flow. And then so we'll go back to those variable expenses you're going to find sometimes. And Jonathan, you can elaborate on this. You're going to find sometimes that you will even see larger investors put the maintenance number at perhaps zero for most months. And then in month five, they have that annualized number. But it's just based on like second quarter losses, third quarter losses, because that allows that allows them to basically set themselves up for refinancing. There's a lot of ways to kind of play with it.
Jonathan Cook: [00:24:50] Oh, absolutely. And yeah, absolutely. There are ways to enhance some of these numbers. I mean, exactly that if you're going quarterly on something like that or how about this novel idea? What if you planned your maintenance out from the start? What if you took care of a lot of your capital expenses from the beginning? When you bought the property, you went ahead and realized, Hey, my HVAC is 13 years old. Maybe we should go ahead and set aside $5,000 to replace that HVAC system in two years.
Christine Bennett: [00:25:24] Or do it right now.
Jonathan Cook: [00:25:26] Right now, and not have to worry about.
Christine Bennett: [00:25:27] It. And a lot of times you'll see.
Jonathan Cook: [00:25:29] This those service.
Christine Bennett: [00:25:29] Charges, right? Exactly. And a lot of times you're going to see that that rental income when you can advertise it. Hey, brand new HVAC system, brand new floors, brand new this that $100 number is usually going to climb from here.
Jonathan Cook: [00:25:43] Absolutely. It is on top of that that those days on market. 15 days. We can we can drop that a little bit, too. What if you've partnered with your property manager before you bought the property? And while you're getting everything ready, you're finishing up all the rent ready stuff. You go ahead and start marketing it before it's actually ready. You pre market this thing so that in day one, day one you already have 1520 showings scheduled. They come in there, you have an offer for rent, you've got several applications completed applications day to day three. Hey, what are those two variables that we have? Maintenance and vacancy. Oh, what if we just cut those down significantly lower because we're actually working with the best people in the industry at making that? And I don't just mean us, I mean your property managers, that those are the best people to be able to handle those those those two tasks.
Christine Bennett: [00:26:39] Right, exactly. So just for I don't know if you guys had pens, if you wrote any of these numbers down, but let's take that vacancy number out real quick or let's reduce that to five days on market and see what happens.
Jonathan Cook: [00:26:54] So if you reduce it to five days on market, that vacancy goes down to $15.28 a month or annualized. It comes down to $183.
Christine Bennett: [00:27:07] Which puts your monthly cash flow.
Jonathan Cook: [00:27:10] At 198.
Christine Bennett: [00:27:13] Ta da.
Jonathan Cook: [00:27:13] Da da. Yeah. It's it's so unbelievably simple. Handling this properly is beyond important. Calculating, realistic numbers is the way that you change your life from. I am making you say you're the average worker in America. You could make like 50 grand a year. Is that. I think that's annualized income in America.
Christine Bennett: [00:27:46] Something like that.
Jonathan Cook: [00:27:47] I suppose whatever it is and you need more actual annual income to meet your financial goals for success in your life. Oh, look at this. This this adds 1500 dollars in your first year. Year to that, 1500 dollars becomes $2,679. Year three, you've added 3000 to your annualised income in just three years. You've added 70 $291.16 to your income, and we haven't even started talking about capital gains. Let's talk about depreciation on your cash flow and property, Christine.
Christine Bennett: [00:28:24] Yes. So I'm pretty sure if you are watching or listening and you're within a couple of months of when this aired, most of the markets that we have a strong it's.
Jonathan Cook: [00:28:39] 2022 anyways how about that.
Christine Bennett: [00:28:41] It's 2022 and you were here for 2021. We've had markets that appreciated by almost 20%.
