Article #1: "Four Elements of Return" for the Real Estate Investor

For the month of October, I will begin our journey by focusing on the FOUR
"ELEMENTS OF RETURN." The first element we will discuss is CASH FLOW!

Simply put, cash flow is the money left over after you pay the bills. To
determine cash flow on any property, you need to know three key pieces of
information:

1. The annual gross income
2. The annual expenses
3. The total debt payment on your loans

Lets use an example property to illustrate. You purchase Boardwalk Ave for
$220,000 and invest a down payment of $30,000. By financing $190,000 at 9% over 30 yrs we would pay a monthly loan payment of $1,450 or an annual debt payment of $17,400. We have four units that rent for $550 each, this gives us an annual income of $26,400. We budget our annual expenses to be 30% of gross income, or in this case $7,920 annually.

Annual Income $26,400
Annual Expenses 7,920
Annual Loan pymts 17,400

Your Annual Cash flow is $1,080. With a down payment of $30,000, your annual return from cash flow would be 4%.

Things to remember:
1. Many investors think cash flow is the ticket to getting rich. Although, I
believe that EVERY property should produce POSITIVE cash flow, a HIGH cash flow at the onset of property ownership, more often than not, indicates that the investor isn't taking advantage of as much leverage as he could.

2. Don't buy into the mistaken belief that a BIG cash flow is the most important element of return. While you're young and still able to work, it might be wiser to structure your deals so they will produce a large cash flow only after you retire. That way, you will have cash available when you truly need it.

3. Evaluating rent. There are 3 ways to look at the income stream of a
building: (1) Scheduled rent, (2) Potential rent, (3) Collected rent. Know your market and ensure that your scheduled rents (the amounts the current leases indicate will be paid) is equal to the POTENTIAL rents for your market. Analyse your collected rents each month to detect high vacancies, poor advertising, problem tenants or "laxed" collective policies. ALWAYS charge a late rent fee, otherwise what will motivate your tenants to pay on time!

4. Evaluate expense. There are three types of expenses: (1) Fixed, (2) Variable, and (3) Planned capital expenses. Fixed expenses are just that, fixed. They include property taxes, insurance, etc. Variable expenses fluctuate. These include management fees, utilities, repairs/maintenance, etc. Planned expenses are major items that have a useful life of more than one year, such as a new roof or exterior paint. The important note hear is that its important to MANAGE all three types of expenses as they each play a major role in how much cash flow your property produces. USE A BUDGET and evaluate monthly to ensure your cash flow goal is accomplished!

Thats it for this topic, next month we will discuss the second element of
return, Debt payment on your loans.

If you have any comments or questions feel
free to make those on our page and I'll respond ASAP.

God bless, BILL