Finding great cash flow properties is easy, right? All you need to do is simply search for a property at an advantageous price that you can rent for a certain amount, so that you realize the expected income after the usual expenses associated with buying a rental property. It seems easy on the surface. However, there’s more to consider, in order to ensure your investment property will generate income for years to come you need to consider several factors beyond purchase price and associated costs, factors such as vacancy rate, realistic rental rates, long term economic outlook, tenant population, short and long term expenses, and property management. This list may seem intimidating but doing some research and analysis of potential properties is key to finding your great cash flow property.
What is the Real Vacancy Rate
Vacancy rates can vary greatly from region to region and even within neighbourhoods in a city, but it’s important to understand the realistic vacancy rates in your potential income property’s area. You need to look beyond the realtor information or property disclosure and check a few sources for the applicable vacancy rates: the Canadian Mortgage and Housing Corporation (CHMC) Statistics and Data reports on rental markets across Canada is a great source of broad strokes information, but bear in mind it will be information from 6 – 12 months in the past. Websites such as www.zillow.com and www.trulia.com provide current information regarding real estate sales markets across Canada and the United States, but there is nothing like going to the locations/market that interests you, contacting a local realtor or property management company and driving around to see what areas have higher vacancy rates.
To maximize rental income potential, areas with low vacancy rates together with a solid population of renters are most desirable to support a property with great cash flow.
What are the Rental Rates?
It’s also important to have an up-to-date understanding of the current rental rates in your potential income property’s area. Once again these rates can vary from neighbourhood to neighbourhood in cities. The following websites enable you to view recent rental rates for various areas across Canada: www.padmapper.com (typically has current rates a week or two old), www.rentboard.ca (mainly for Alberta), www.gottarent.com, www.apartmentscanada.com, www.kijiji.ca, rentbc.com (for British Columbia), www.realtor.ca and even the CHMC website (remember CHMC data is an reasonable indicator with its broad stroke and retrospective but may not have significant relevance to the property or neighbourhood that interests you).
Having a good sense of realistic rental rates for the area and type of property you’re considering is very important when it comes to crunching your numbers and determining your potential cash flow. Setting your rental rate too high or too low can prevent you from realizing the potential of your rental income.
It is also important to consider the impact of the applicable Residential Tenancy Act for your potential property. Such legislation can limit your ability to increase rental rates and ensure your rate keeps up with the percentage increase in your expenses.
Budgeting Recurring/Potential Expenses
When thinking about cash flow, it’s easy to focus on the amount of rent you can realize, but it’s important to do your due diligence regarding recurring and potential expenses – those in addition to your purchase price and associated costs. These expenses have to be deducted from your rental income in order to provide your properties cash flow. Recurring costs include monthly expenses such as mortgage/HELOC/loan payments; principal and interest property taxes; condo/HOA fees (if it is in a multi-unit property); property management fees; landscaping and monthly maintenance fees. The costs associated with the transition between renters are also recurring costs and may include items such as cleaning, painting, repairs, and loss of income while the property is not rented. The costs associated with securing a new tenant must also be accounted for: advertising fees, lease up/management company fees if you aren’t directly handling the transition -, or the real cost of your time if you are doing so.
Potential expenses include the cost of repairs and renovations both planned and unplanned, and both large and small, such as the replacement of roofs, hot water tanks, appliances, and/or yard maintenance equipment, as well as exterior refinishing, landscaping, etc.
In order to have funds when you need them, especially for unexpected or annual costs, it is wise to set aside a certain percentage from your monthly rental income. Between 6 – 10 percent depending on the property’s initial purchase price and condition, as well as how long you expect to have the property is recommended. These numbers also need to be part of your cash flow analysis in order to identify great cash flow properties.
As the saying goes: Location is everything, but it is most powerful when paired with market timing. Focus on what the real estate/rental market is doing in particular regions and then narrow it down to specific neighbourhoods in order to identify preferred great cash flow properties. It is important to understand location goes beyond the physical location of your property.
Real estate is a function of the overall economy and may have more specific economic influencers in particular areas. Factors such as real estate values, vacancy rates and rental rates typically move with jobs availability and population growth. To ensure great cash flow you also need to consider the current economic reality and future outlook of the geographic areas you’re considering. Review the GDP (Gross Domestic Product) of the region and even the city if available. Desirable economic realities such as a community with steady or increasing economic growth; a high sustainable employment rate (local unemployment lower than the national or provincial average), population growth, and diverse available jobs attractive to renters make the difference between an adequate cash flow and a great one.
When investing in higher risk locations such as a resource town, single employer community or path of progress area, timing is everything in order to realize a return on your investment:
Resources towns can provide very lucrative opportunities for the savvy investor because of large growth potential for a period of time. These communities often have one or a few large employers such as a mining, mills or logging enterprises. However, such communities are very susceptible to significant economic swings and the savvy investor has to be aware that the boom/bust nature of resource towns can have a drastic effect on your investment. These are not always the best opportunity for the average investor that can’t accommodate large swings in the property values and or rental rates and vacancy rates.
Investors comfortable with a higher risk situation, may want to look for a “path of progress” opportunity – a location where economic growth is expected but may not yet realized. This type of situation may require some patience before it becomes a great cash flow property. Researching these towns is critical and physically going there and speaking with the economic development office and people in general is highly recommended to really get a feel for what is happening and/or anticipated. The Conference Board of Canada and the Urban Futures Institutes reports (typically available on their websites) are good sources of information for current and future economic growth.
You may find a property at a great price but if the area isn’t attractive to the type of renter you wish to have it’s not likely to be a great cash flow property. You need to understand your renter and ensure your potential property is close to the type of amenities they would like. Check websites such as www.walkscore.com for the walkability of your potential property – the higher the walk score the more desirable. For example, population groups, such as the Millennials, who may not be prepared to purchase a home, but want their rented home to have all the creature comforts and amenities, will typically favour high walk scores and may prefer a location that doesn’t require them to use a car to get to and from work, entertainment and shopping, etc. An older renter, such as an empty nester who is or has downsized might also appreciate a high walk score because they are looking for the conveniences to support their lifestyle.
Know Your Role
Many investors believe real estate investing will be easy and won’t take too much of their time; that they can do it all – from researching, identifying and purchasing their property, through finding, renovating or overseeing renovations and vetting tenants, and managing the property month to month, year over year. However, every one of us has different strengths and weaknesses, as well as different tasks that we may or may not like to do.
Depending on your own strengths, weaknesses and preferred tasks, you will be well-served to identify other professionals or resources that will balance your weaknesses and the tasks you dislike. Once you’ve done that, you’ll have a better sense of the costs required to obtain these services and can include them in your numbers. You also need to consider the value of your time, determine what it is worth, and factor this cost into your analysis/numbers. Including these costs as part of your expenses provides you with a realistic calculation for your property’s cash flow.
Investing in Cash Flowing Real Estate
When investing in cash flow properties you must also consider your reason for investing: is your plan to buy and hold the property for a long term investment, or do you plan find a property that you are going to improve and flip? It’s important to be aware that your return on investment upon the sale of your property will be affected by whether or not your property is considered inventory (as it would be in the case of a “flipping” property) or a longer term investment (where the gain will be treated as a capital gain). This means in order to have a great cash flow property, you need to know how the disposition of your property is going to be viewed by the applicable tax authorities and then incorporate this tax treatment into your calculations when determining the potential cash flow for the property you’re considering.
Real estate investing versus real estate flipping is a long term commitment, crucial to that is identifying great cash flow properties that will perform for you and provide the return on investment you’re desire. It’s important to do the research, understand your property and the community it is in, as well as knowing and incorporating all the numbers. Fundamentally for your return on investment, you have to consider the initial/entry price for the property, the annual cash flow, your potential exit price and the time you expect to own the property. Your annual cash flow must include all your expenses related to that property, its use as a rental income investment as well as its maintenance and repair.
Great cash flow properties are out there and with some research, due diligence with respect to expenses and a bit of number crunching, you can find your great cash flow properties.