Have you ever considered investing in mobile home parks? 

If not, why? 

Mobile home investing is largely overlooked by real estate investors. We tend to prefer single-family homes, multifamily units or other kinds of commercial real estate. But mobile home (aka manufactured housing) parks can be profitable assets—in part BECAUSE they are often overlooked by others.

In this article we will answer three common questions about mobile home investing:

• Is mobile home investing profitable?
• How do people become wealthy investing in mobile home parks?
• How does mobile home investing work?

We’ll also give you four key points you need to know before jumping into this exciting opportunity. 

Soon, you’ll see how mobile homes can add value to your portfolio—even though they may not be the most glamorous asset class. And as always, take our quick investor quiz if you need more info, and we’ll help you take that next step.

Is Mobile Home Investing Profitable?

Mobile home investing comes with risks, just like any other investment, but it has a lot of potential to be very profitable. 

As mentioned, a lot of investors simply don’t think about trailer home parks. They simply don’t want to get involved.

Their loss, your gain! The relative lack of competition can benefit you in the following ways:

• Income generation 
• Asset appreciation
• Tax benefits

Mobile home investors often own the land and not the units themselves, making mobile home parks among the lowest-cost investments (per unit) in real estate. That low start-up cost means that yes, there’s lots of room for profit.

Aside from the relatively low barrier to entry, mobile home park owners have little (or no) maintenance costs compared to other real estate asset classes. This us because mobile homeowners (not the landlord) are responsible for:  

• Care of the mobile home
• Updates to their property
• Repairs

To put it another way, a mobile home park represents much less money spent on upkeep than apartment buildings, townhouses, or single-family dwellings. 

Finally, there is plenty of potential for your investment to grow over time. In general, mobile home parks appreciate because:

• Tenant occupancy stays high: Mobile homeowners cannot quickly leave their home.
• They are in demand: Zoning laws keep the number of parks steady, and affordable housing is in high demand.
• They are low-risk: Lots of units mean spreading out the cost of evictions or other random expenses.

How Do People Become Wealthy Investing in Mobile Home Parks?

Tenants need affordable places to live, and increasingly mobile homes are fulfilling that role. With mobile home investing, you have an opportunity to meet an ever-growing demand for affordable housing and build your wealth.

There are several ways investors can become wealthy by investing in mobile home parks: 

Cash flow

Since the 2009 housing crash, mobile home park investors have seen an enormous return.

Recession resistance

Mobile homes are recession-resistant because they’re the most affordable type of housing available in the market. When a recession strikes, tenants who used to live in single-family homes look for more affordable options. This causes the demand for mobile homes to increase. Because of this, a mobile home park performs better in a recession than other real estate assets.

Lot rent

Most mobile home lots are leased for 12 or 24 months. It's standard to see lot rents increase anywhere from 10 to 15 percent annually to match the market. 

Tenant stability

Mobile home parks are in the “affordable housing” sector. Tenants living in mobile home parks do not have the financial resources to move. They stay in mobile home parks longer than they do in apartment buildings. Additionally, once a mobile home gets into a park, it stays there. Even if they own the trailer itself, when a tenant needs to move, they typically sell the mobile home to another tenant. The mobile home itself stays in the park. 

The Warren Buffett Effect

In 2002, Warren Buffet acquired Clayton Homes, the largest builder of manufactured housing and modular homes. Berkshire Hathaway then teamed up with 21st Mortgage to introduce the "CASH" program, which helped mobile home investors get new mobile homes onto their lots with little upfront cash. In exchange for the homes, park owners send prescreened tenants to 21st Mortgage. 

Investors benefit from having new homes to attract preferred tenants.  Clayton Homes and 21st Mortgage benefit from prescreened applicants. And the tenants get a home. Everyone wins!

Low risk/high reward appreciation

Using the "CASH" program (similar programs exist from other lenders), mobile home park owners can fill their lots with attractive homes. Then, they fill those homes with tenants and increase the value of the mobile home park. 

Tax and Financing Benefits

You can use IRS tax code Section 1031 to avoid paying tax when buying and selling “like-kind” assets. A 1031 exchange investment strategy enables you to: 

• Sell a piece of real estate property.
• Use the profit from the sale to buy a mobile home park. 
• Avoid paying capital gains tax. 

How Does Mobile Home Investing Work?

For a case study on how trailer park investing really works (and how you can get started), refer to our interview with Frank Rolfe about mobile home park investing and how he built a profitable empire. 

The short version is something like this:

• Mobile homes are inexpensive
• The bargains you can get mean you have a “low risk and high reward” situation

To achieve success, Frank focused on offering lower rental rates than his competitors. The low rents appealed to potential tenants, and as a result he maintained full occupancy in his parks. The result? His $400,000 initial investment turned into a $1.5 million sale.

Let’s look at two types of mobile home investors. 

Owner type 1 owns:

• The lots underneath the individual homes
• The land surrounding the lots
• Streets
• Utility systems
• Other amenities (pools, club houses, etc.)

In this type of ownership, the tenant owns the home and pays rent for the land plus the use of amenities. 

Owner type 2 owns: 

• Everything owner 1 owns
• ... plus the actual mobile homes themselves

In this type of ownership, the tenant pays rent for the trailer and the land it’s on.

4 Things You Should Know About Mobile Home Investing

Now that we’ve covered the reasons you should consider investing in trailer parks, you’re ready to take the next step. But first ...Here are the four major things to know about mobile home investing before you take the big dive:

#1 Mobile home investing is a largely untapped resource. That’s why there’s huge opportunity here.

#2 Because this asset class has a proven track record, favorable financing options are available. That makes getting started easy.

#3 Section 8 vouchers to purchase a mobile home are driving demand for affordable housing. 

#4 Market cap rate compression means investors are seeing a solid return on investments—and will continue to do so for the foreseeable future.

Mobile homes are going to be in higher demand as economic uncertainty and a lack of traditional affordable housing lead people to look for affordable housing. So it may be the right time to make the leap. 

 

If you're a Canadian citizen interested in investing in property or other business ventures in the U.S., an E-2 visa is not the only way you can do so. However, there are advantages to obtaining an E-2 visa if you can qualify. 

The E-2 visa allows people from other countries (including Canada), to enter legally if they are investing substantial capital into the U.S. economy. For Canadian investors who can meet specific qualifications, the E-2 visa has many benefits, including allowing them to freely travel between countries without restrictions on the length or frequency of trips. 

What Is A Treaty Investor (E-2) Visa?

An E-2 treaty investor visa enables citizens of countries with which the United States maintains treaties of commerce to buy or start businesses in the U.S. For Canadians, an E-2 visa will be valid for five years and can be renewed for as long as the business remains in operation.

So Do I Have To Move To The U.S.?

So you’re a Canadian who wants to get in on the super-hot U.S. real estate market. Does that mean you have to move to the States?

No way! Getting a treaty investor visa does not require you to move to the U.S.! You can remain a Canadian taxpayer and resident while managing your business. Getting an E-2 visa is more about giving you options and simplifying business travel to and from the U.S.

How Do I Qualify For An E-2 Visa?

For you to qualify for an E-2 visa as a Canadian citizen, you must have “invested” a “substantial amount of capital” in a “bona fide enterprise” in the United States or be actively in the process of making such an investment. 

*All of the terms in quotes have a special legal meaning in immigration law, so we’ll define and discuss each of them below. 

You also must show that you are only seeking to enter the U.S. to develop and direct the business by proving you own at least 50% of the enterprise or have operational control over the business.

“Invested”

In this context, the term “invested” is defined as placing capital, such as funds or other assets, “at risk” with the goal of earning profit. This means that the capital must already be subject to partial or total loss if the enterprise fails. You can’t qualify for an E-2 if you have only planned to make an investment; you must have already done it. 

“Substantial Amount Of Capital”

The law does not set a specific monetary threshold that must be met for your investment to qualify as a “substantial amount of capital.” Instead, it establishes guidelines that look at the proportionality of your investment compared to the entire cost of establishing or purchasing and operating the business. Your investment must also be of a sufficient amount to prove your financial commitment to the business’s success. 

“Bona Fide Enterprise”

A “bona fide enterprise” is defined as a real, active, and operating business that produces services or goods for profit. The condition that businesses be “active” is often the trickiest part for real estate investors. Ordinary buy-and-hold real estate investing won’t meet the qualifications for an E-2 visa, and a simple real estate flipping business probably won’t either. Investment plans involving managing multiple rental properties or consistently buying, selling, renovating, and renting properties are more likely to satisfy this requirement.

How Do I Know If I Should Get An E-2 Visa?

So to sum things up, Canadians don’t need an E-2 visa to invest in the U.S., but it can be a valuable thing to have if you plan on running an active real estate investment business in the States. However, it will not be a feasible option if you just want to passively invest in U.S. real estate. 

If you want to know the best course of action for your situation, ask a real estate investment attorney for their advice. Even if an E-2 visa does not work for your investment business, there are other options you can pursue that better meet your needs. An experienced professional can help you make the right decision for your investment plan.

You may also be interested in the following resources:

• Asset Protection Structures For Canadians Investing In U.S. Real Estate
• 8 Tips For Canadians Investing In U.S. Real Estate
• How Limited Partnerships Protect Canadians Investing in the United States
• How Are Canadians Taxed If They Invest Or Do Business in The United States?
• Scott Smith's Advice For Canadians Investing in U.S. Real Estate

Internal rate of return (IRR) and return on investment (ROI) are two critical performance metrics for real estate investors.

But do you understand the difference?

They both offer ways of quantifying how well your investment is doing, but IRR is the one that is often under-appreciated and misunderstood. In this article, we’ll show you why overemphasizing ROI and ignoring IRR is a serious mistake if you’re a sophisticated real estate investor.

We’ll tell you what IRR is and how it differs from ROI, how to calculate it, and what it does (and doesn’t) tell you about your rental property.

What is IRR / Internal Rate of Return?

Let’s get this out of the way: IRR sounds boring. 

It sounds like one of those metrics that online real estate gurus dug up from some decades-old finance textbook so that they could sell courses.

It sounds like something you don’t actually need to know to make money in real estate, even though it might come in handy every once in a while.

To be honest, by and large, those guesses are not too far from the truth.

But rest assured you can use IRR for every rental property you’re thinking about investing in. Its utility as a key metric in real estate investing is massively underrated, and you can use it to show your friends and colleagues that not all investments are as good as they appear.

Two Things to Know About IRR

The first—and arguably most important—thing to know about IRR is that it takes the time value of money into account. The time value of money, or TMV, is a popular and widely accepted notion in finance that a dollar today is worth more than a dollar tomorrow.

Most economists and financial advisors believe that this is true for a myriad of reasons: every day inflation eats away at the purchasing power of your money, you could miss out on certain opportunities if you don’t have any cash on hand, you can’t cover emergency expenses without reserves (and borrowing that money could incur massive interest over time), among others.

However, when you use IRR to measure your investment, it takes this enormously important factor into account by setting the net present value to zero. This way, later distributions carry less weight.

Also, IRR is an annualized figure, which means it measures year-over-year performance. In the next section on the difference between IRR and ROI, we’ll show you an example of how ROI can mislead investors into believing that an investment performed better than it really did.

As a quick recap:

• IRR takes into account the time value of money, which states that a dollar today is worth more than a dollar tomorrow.

• It’s also an annualized figure, unlike ROI.

How Does IRR Differ from ROI?

If one of your friends told you that he earned a 170% ROI upon the sale of his investment property, your first inclination would be to think, “That’s a great investment,” right? 

What if you learned that he bought the rental property in 1990 and sold it in 2020?

Not as great sounding, now, is it?

Over the course of 30 years, that 170% return isn't as impressive as it sounded at first. Assuming he actually factored his maintenance, taxes, and closing costs into account, your friend fell short of beating even the most basic and easily accessible stock market index. In that same 30-year period, the S&P 500 delivered an 864% ROI (with dividends reinvested: 1692%). He underperformed ten-fold.

However, if he bought the property in 2019 and sold it in 2020, anyone would be in awe of those 170% returns.

Exact same ROI, totally different investment performance. Why? Because ROI doesn’t take time into account. That’s one of the key ways in which IRR differs from ROI. You can use IRR to compare your investment properties to the expected returns of other assets you might be interested in buying, like REITs, ETFs, commodities, and more. You can’t do that with ROI (at least not to the same extent.

How to Calculate IRR

Before Excel spreadsheets and financial calculators, IRR wasn’t very popular. The formula isn’t easily understood, so we recommend you simply plug the numbers into an existing online IRR calculator.

With that said, we’re going to give you a quick overview of what IRR might look like for an average $300,000 rental property that you plan on owning for 10 years before you sell. To make things easy, we’ll assume you buy it in cash.

Let’s say it’s a duplex and each side rents for about $800 and increases to $1000 over your timeframe.

Initial Investment: $300,000

• Year 1: $19,200
• Year 2: $19,200
• Year 3: $19,200
• Year 4: $19,200
• Year 5: $21,600
• Year 6: $21,600
• Year 7: $21,600
• Year 8: $21,600
• Year 9: $24,000
• Year 10: $24,000

Then, you earned $100k after selling your rental property for $400k. All in all, you earned $311,200. That’s more than a 200% ROI. Your IRR ends up being 9.09%.

You can play around with the numbers above to see how IRR accounts not only for how much money you earn but also when you earn that money. If for some reason, you expected to charge higher rent for the first few years and lower rent for the last few years, the metric would drastically change to reflect that.

Conclusion: Why You Should Know Your Property’s Internal Rate of Return

A property’s IRR is important because it takes into account the time value of money in an annualized way. A 200% ROI sounds good until you learn it took place over the course of 40 years, and there are tons of other investments that would’ve outperformed it by a mile.

By calculating your rental property’s IRR (or its assumed IRR), you can accurately compare the investment to those in other asset classes, like commodities or ETFs.

 

“Subject-To” mortgages are going to be a defining feature of the post-COVID real estate market, and here’s why…

As of April, roughly 2.5 million homes are in forbearance, according to the Mortgage Bankers Association. That means that they’ve entered an agreement with their lender to delay foreclosure.

Due to restrictions set up during COVID to limit the spread of the virus, lenders couldn’t officially evict homeowners who weren’t paying down their mortgages. With those restrictions being lifted, lenders are going to start to foreclose on the homes that are in forbearance.

That means many people are looking to get out from underneath their mortgages, and that means that the housing market might experience a boom in the supply of certain properties.

For the savvy investor, this is the opportunity of a lifetime.

What is a ‘Subject-To?’ How Will It Affect the Market?

"Subject-To" is a way of purchasing real estate where the real estate investor takes title to the property but the existing loan stays in the name of the seller. In other words, their interest is “subject to” the existing financing. The investor now controls the property and makes the mortgage payments on the seller's existing mortgage.

If, for example, the seller locked in a $200k mortgage at a 3.8% interest rate, instead of getting another lender to come up with a new loan (and therefore racking up a bunch of costs associated with that process, including inspection, appraisal, broker fees, etc), the investor just pays the ~$1150 mortgage and the home is theirs.

So here's the Cliff Notes version:

• “Subject-To” lets investors purchase properties without having to qualify for a new loan. They simply take on the seller’s existing loan, making payments in their place.

• The seller gets out from underneath their loan and the investor gets to purchase a home with nowhere near the same level of requirements as they would if they wanted a new mortgage.

How Do You Find ‘Subject-To’s?’ Why Do You Want Them?

What makes subject-to mortgage investing so great? There are a few reasons…

#1 You Never Have to Qualify

"Subject-To" is a great way to build a portfolio. The loans are not in your name and you never have to qualify. The seller already qualified for the loan; all you’re doing is making their payments and putting your name on the title.

In order to qualify for a conventional loan, you have to provide proof of income, a solid credit score, a low debt-to-income ratio, and more. However, when you’re buying properties “subject-to,” those same requirements don’t exist. This makes it that much easier to rack up a bunch of rental properties.

#2 Lower Fees

Fees can completely ruin a real estate transaction. A 3% broker fee every time you buy and sell real estate can kill many deals—even if there are potentially tens of thousands of dollars to be made. If it all ends up going into the realtor’s pocket (and their brokerage’s pockets), then what’s the point?

When you take over an existing mortgage, though, you don’t have to worry about brokerage fees, along with many others. You can become exposed to the real estate market in a low-cost way, completely changing the dynamics of the deal.

Even if the seller has a backlog of three months of missed mortgage payments, it’s a drop in the bucket compared to the costs that are typically associated with buying a home in the first place. 

#3 Easier to Rack Up a Portfolio with Little Money Down

This ties in with both of the points that we made above, but it’s a big one: when you don’t have to qualify (and re-qualify) for mortgages and you can avoid closing costs (along with many other fees), it becomes much easier to rack up a decently sized portfolio with less money.

Furthermore, many people who qualified for these mortgages simply suffered some form of financial hardship at the worst possible time: a once-in-a-century global pandemic. The loans don’t always have poor interest rates and the sellers were sometimes able to put down a sizable amount of cash for the down payment.

So, there are good mortgages out there just waiting for someone else to take them over. And, finally, that brings us to our last point:

#4 Unprecedented Opportunity

During the 2008 meltdown, roughly twice as many homes were in forbearance, so why is the COVID-19 pandemic any different? How could it possibly be an “unprecedented” (admittedly an overused word these past couple of years) opportunity? 

Unlike today, in 2008, many average investors didn’t know that a possible crash was looming. With the pandemic being such a global and ever-present phenomenon over the past year and a half, we have hard data on exactly how many people aren’t paying down their loans and we have a rough idea of when the restrictions might be lifted.

In this case, though, there’s time to prepare for the surge of these types of properties. Sure, they’ll be in demand—but there will also be an incredible supply.

Conclusion: ‘Subject-To’ Mortgage Investing: Buying Homes in the Post-COVID Market

A record number of homes are in forbearance. According to the Mortgage Bankers Association, it’s about 2.5 million. With COVID restrictions being lifted across the US, lenders are going to start cracking down on those mortgages, which means many people will be looking for a way out.

Savvy real estate investors can offer them a way out: through “subject-to” mortgage investing. The investor will add his name to the title and make mortgage payments in place of the seller. It can be a great way for the investor to make a low-fee deal and for the seller to get out from underneath a mortgage that he or she can no longer afford.

How will you accomplish financial freedom through real estate investing? 

Start by thinking where in the U.S. you’ll be investing, what type of asset you want to hold, and how you’ll form the relationships you need to make foreign investments.

Once you’re ready to make your first real estate investment in the U.S. the question is: Where should you look? Real estate markets are constantly changing, but Scott Smith, head attorney at Royal Legal Solutions, has a few tips especially for Canadian investors. Scott gave this tips on a recent appearance on the The REITE (Real Estate Investing Training and Education) Club podcast, which you can check out below.

In a hurry? Keep reading to get the high-level overview of everything covered on the show ...

Where Should Canadians Invest In the U.S.?

Canadians looking for a good deal in real estate should keep a few specifics in mind. What kind of investment makes sense to you?

Our last article had lots of tips for Canadian real estate investors (go check it out if you haven’t already), but we’d like to look a little more at the “location, location, location” aspect in this article.

“I’m hot on the Midwest now, inside the Rust Belt,” Scott says. “I’m liking some of the deals I’m seeing in Florida. And Tennessee has some interesting deals coming through, as well as San Antonio in Texas. This is where I’m seeing people buy those single-family homes, or one to four-unit properties. Those are the areas where people are buying $90,000-150,000 properties and can scale from there. 

“I talk a lot about those properties because that’s where you get really great financing instead of personal financing. For most Canadian investors, that’s where you’re going to start.”

If you’re investing in an area that you don’t know anything about and can’t even visit, you are building more risk into the proposition. If you CAN scope out the property in questions, do your due diligence. Walk the neighborhood or ride a bike—you’ll see a lot more than you will just driving around the block. Get a feel for the neighborhood. 

What Tenants Do You Want To Rent To?

Research will give you insight into what kind of tenants you can expect to attract. For example, you should research the income range for your neighborhood. Government agencies have a lot of this economic data available for the taking.

“There are some key things you want to stay on top of regarding what makes a good deal in the U.S.,” Scott says. “You want the median income for the area to be above $40,000 per year. Look for job stability and job security as well. That’s why I like investing where the employers are the government, big corporations and universities.”

What about crime statistics? A lot of Canadian investors think about crime in the areas where they are considering an investment. But Scott says you shouldn’t focus on it too much.

“Almost invariably in the U.S., crime follows job stability and economic depression. So as long as wages are high enough, and we have job stability, crime won’t be a factor for you. I don’t even pay attention to crime reports at all, really. They don’t give you the best source of information for an area.”

What Prices Should Canadian Investors Expect To Pay?

Scott says you shouldn’t necessarily let high prices scare you away. It’s important to watch the macroeconomic trends of a given area or market. That’s more important than historic information based on what people think the prices “should be.” As long as an area has long-term population growth, big price tags shouldn’t frighten the investor away.

“If I have a lot of people moving into a city over time, I am not so price sensitive. I know the demand will push prices up over time. This is exactly what happened in Austin. Four or five years ago in Austin, nobody wanted to buy property at $200 per square foot, because just a few years earlier it was $150 per square foot. That was insane, we thought. But the demand to move to Austin and the tech industry there was so strong, now it’s $400 per square foot.”

Buying and Financing Real Estate

You may acquire property directly in the name of the Limited Partnership. However, some of Scott’s Canadian clients get better financing rates when they purchase property in their personal name first. It just takes a Land Trust to do it right.

The Land Trust will let you own the property anonymously. It also allows us to avoid something called the due on sale clause.

“This means you can actually buy the asset in your personal name, then transfer it into the Land Trust,” Scott says.

Next, you’ll create a warranty deed to transfer the asset into the Land Trust so it's now held by the Limited Partnership. This is a huge cost saving measure for Canadian investors.

No matter what type of financing or what type of asset you’re working with, the Limited Partnership/Land Trust structure lets you hold that asset anonymously, in a way that's protected. You're also going to be able to always be able to take advantage of the best possible financing and have the best possible tax advantages.

How To Get Started With Your 'US Team'

You’re a first-time Canadian investor in the U.S. It may be tough to know where to start, especially if you can’t fly out to a property and visit it in person. 

Royal Legal gives you access to a network of coaching, preferred vendors, and connections to people who can help you with your U.S. investments. In addition, you'll have access to other investors and to turnkey professionals, including tax and accounting specialists who are used to working with Canadians. 

When you partner with Royal Legal Solutions, you will have some of the industry’s finest attorneys and CPAs on your personal real estate dream team. We’ll help you break down the numbers you need to hit to reach financial freedom. 

We’ll even help you develop acquisition strategies. What do you see as your vision moving forward? Once you answer that question, you can set up the appropriate legal structures to get lending, estate planning, and all the other components needed to put your plan in place.

What’s your target ROI? Let’s analyze your full capital stack. What’s your target return over time to hit your retirement goals? Start with our investor quiz and we’ll help you. A coach will help you clarify your situation. Goals and tactics from books and websites are great, but you need to know something beyond “I want to invest in apartment complexes.”

It may take a couple of sessions to get all the numbers, but knowing the answers to these questions can help you know exactly what kind of ROI you need to hit your goals. From there, you'll work backward, using your current income to pinpoint the asset classes you should be targeting.

 

 

 

Are you a Canadian investor with an eye on the red-hot U.S. real estate markets? 

If you are, break out the Tylenol, because complicated legal and tax issues can give you a headache before you’ve even started!

Our lead attorney, Scott Smith, recently met with Canadian real estate investing coach David Dubeau to discuss the issues Canadian investors face when investing in the land of the Yanks. Scott has a lot of advice in another article, [[LINK]]] but in this article we’re going to look at the “investment checklist” Lauren A. Cohen introduced during the meeting.

You can check out the talk between Lauren, Scott and David below, or keep reading to get a free download of Lauren’s Eight Steps to Successful Real Estate Investment Across Borders.

Lauren’s Investment Checklist

Lauren’s checklist is designed to ensure success when you're investing across borders. These elements are interconnected. That means you shouldn’t focus on one and ignore the others. 

Here are her tips for Canadian investors looking to make a play in the U.S.

Tip #1 Study The Local Market

Real estate is always about “location, location, location,” right? You’ve heard that one a million times, as have we all. But you need to truly understand the reasons to select a particular location over another.

Where in the U.S. should you invest? Are you looking at one city or region or multiple areas? Why?

Just as in Canada, there are hot areas and not-so-hot areas. You’ll need to look into state and city tax and zoning considerations before making your play.

Your coach/mentor (see the last tip) will help you find your way so you don’t waste time looking at properties in areas where you’re likely to fail.

Need tax help? See our article How Are Canadians Taxed If They Invest Or Do Business in The United States.

Tip #2 Define Your Investing Goals

Lay out your goals in the beginning. Where do you want to be in three months? What about in three years?

If your short-term goals do not match your long-term goals or if you don't consider your long-term goals at the beginning of your journey, you're going to end up in a world of hurt.

Here’s an example of what we mean: If you invest in your personal name because you found a good deal and want to act fast, you may very well realize down the road that you should have set up the appropriate asset protection structures first (often a limited partnership for Canadian investors). Then you may have to go back to square one and fix everything. 

A failure to plan is a plan to fail!

Tip  #3 Know Which Property Types To Target

What types of properties should a Canadian investor look at and why? 

You have a lot of options to consider: Vacant lots. Residential. Multifamily. Commercial. Industrial. Mobile Homes. Retail. Real Estate Investment Trusts (REITS). All of these could potentially qualify you for immigration status (though REITS have to be set up very carefully to qualify).

Refer back to your short and long-term goals. Here again, your coach should be able to offer guidance, as there aren’t really any one-size-fits-all solutions.

“As soon as you're investing in multi-family properties with five or more units, you could be ready to invest in a commercial building, and commercial financing is a little easier to come by because it's not only based on your credit score,” Lauren says.

“In the U.S., unlike in Canada, your credit score dictates everything. It’s like the be-all and end-all. And when you're dealing with a commercial property it's also based on the returns on that property. You're going to show tax returns—kind of like buying a business. So it's all about how creative you can be when it comes to financing.”

Tip #4 Choose the Right Legal Entity

Do you need an LLC, a corporation, or a partnership? 

“From a pure asset protection standpoint, it doesn't matter what's happening on the Canadian side of things,” Scott says. “So if you already have a Canadian tax treatment that you like, the Limited Partnership structure is going to be the right structure on the U.S. side of things for you to then channel into whatever Canadian asset holding company you have.”

#5 Decide Whether To Invest Alone Or With Partners

A lot of Canadians like to joint venture with other Canadians who already have properties in the U.S.—especially if their partners already have access to financing. 

Maybe you want to create a real estate fund. Maybe you already have partners that want to invest with you. You may need to bring in a securities attorney, but there is a way forward that is right for you. 

Can’t find the way forward? Then you need to … wait for it … Discuss your needs with your mentor. You may also visit DavidDubeau.com if you need help finding other capital sources. 

#6 Learn How To Purchase Properties in the U.S.

Canadian investors can apply for a mortgage with an American bank or with Canadian financial institutions with operations in the U.S. You’ll probably have to show your passport, international credit report, employment history, residency verification, tax submissions, and proof of down payment.

Generally, dealing directly with Canadian banks means better mortgage rates. Think about it: Canadian lenders are naturally more comfortable lending to Canadians. A Canadian bank with U.S. operations will often approve your financing quickly and relatively painlessly. These would include Royal Bank of Canada (RBC) and Bank of Montreal (BMO).

What about your investing strategy? There are a lot of different strategies: the BRRRR Method, flipping, the buy and hold method, wholesaling … Some of these qualify for visas and some of them don't. Again, that's why your short and long-term goals are so important. Do you want to buy properties outright? Do you want to buy them “subject to”?

Side note: Everybody wants to buy “subject to" mortgages and they're going to be available in a big way in the next year. Why? Because forbearance is going to come due. Forbearance was implemented in the U.S. so mortgage holders could flip payments to the back end of their payment schedule. Any COVID-related pause on mortgage payments is ending and some property owners are simply not going to be able to pay their mortgages.

#7 Know The Immigration Considerations

Do you need a visa to invest in the U.S.? Does getting one mean you have to spend a lot of time in the U.S.?

Getting a visa is often about giving you options. Just because you get a visa does not mean you have to move to the U.S.! 

That's why Lauren loves Treaty Investor (E-2) visas, which are for citizens of countries with which the United States maintains treaties of commerce.

The Treaty Investor visa is based on a substantial investment in a non-marginal business. It gives you, the private investor, the flexibility you need. With this visa you're never going to have a problem coming and going across the border. 

But again, you don't have to move. You can remain a Canadian taxpayer and resident. Or you can be a resident of another country and stay in the U.S. on an E-2 visa from Canada.

You have to have an “active” business to qualify for a visa. You have to figure out how to turn what's usually considered a passive investment (real estate investing) into an active business.

You need to be at least 50 percent owner in the company making the investments.  You have to show that you have boots on the ground if all you're doing is becoming an equity partner in the company.

#8 Partner With Professionals (And Find A Mentor!)

Lauren says her favorite words are, “Stay in your lane.” 

Don’t try to play realtor, lawyer and accountant. Put together a team that can guide you, help with due diligence, analyze the price comparisons, and perform deal analysis. It's important when you're working with people on cross-border deals that it's not their first rodeo. 

You may be an experienced real estate investor, but it’s important that you (and your tax and legal advisors) know the differences. Dealing with Americans is different than dealing with Canadians. Not getting the right advice is going to end up costing you more than you will pay to get the guidance you need.

Make sure your team members are vetted and reliable. You need to think about immigration and securities. You need Canadian counsel to make sure that your estate in Canada is protected. Someone will have to help you with taxes on the CRA side and the IRS side.

This can be overwhelming if you don’t have help. That’s why you need a coach.You need somebody that understands everything on both sides of the border. You need somebody that has been down this path, someone who can guide you. Otherwise you’ll invest haphazardly and without a strategy.

Start with our investor quiz and we’ll help you put together the right team for your goals—a team that will evolve as your needs change.

“Without a professional team, investors will get set up right for what's going on at a specific time and point in their life. They don’t think that anything might change ... because they don't know what triggers different considerations,” Scott says. 

“If you have a limited budget, that's fine. Just budget out an hour per quarter to meet with your team. It will only cost a few hundred dollars or whatever the case may be, and it is going to potentially save you tens of thousands of dollars.”

In other words, as Scott says, you should avoid tripping over pennies on your way to dollars and you’ll be set up for long-term success.

Get Lauren’s Guide

Before you get a coach, you can get a guide. This article is a very basic overview of Lauren's popular guide called Eight Steps to Successful Real Estate Investment

Across Borders. It will help you figure out your next step. 

It’s a $47 value, but if you use the special code for Royal Legal Solutions readers, you get it for free. The code is REI4FREE.

About Lauren

Lauren, originally from Toronto, is founder and president of e-Council Global and is a cross-border strategist experienced in both law and real estate. She hosts a podcast, Investing Across Borders and works with us to help Canadians looking to invest in U.S. real estate. 

 

 

 

 

What are the benefits of selling real estate “as-is”?

If you’re a real estate investor, you need to know what “as-is,” means. Having an “as-is” clause in a real estate contract could potentially save you from many litigation issues down the line. What are the benefits of this type of real estate deal? What are the drawbacks?

In this article, we’ll go over all of that and more, including:

• What it means when a property is being sold as-is.
• How as-is properties differ from houses on the traditional market.
• The pros and cons of selling real estate as-is.

What Does It Mean When a Property is Sold As-Is?

If you’ve ever shopped for homes online, chances are you’ve run into a property description that included the phrase “as-is.” Chances are that the house was significantly cheaper than the other houses in the area. Why is that? What does it mean when the owner is selling the property “as-is?”

Selling real estate "as-is" means that it’s being sold in its present condition, without any stipulations that the seller fix this or that. It doesn’t matter if the roof is caving in and the water isn’t running. As long as the seller follows the disclosure laws in his or her respective state, he or she doesn’t have to make any repairs to the home to get it in livable condition. It comes exactly as you see it, or “as-is.”

Here are some quick things you should know about buying and selling real estate as-is:

• As-is properties typically are in worse condition than other homes on the market. That’s why they’re usually less expensive than those other homes.
• If you’re selling a rental property (or any property, for that matter), including an as-is clause can save you from a litany of possible legal issues.
• Often as-is deals are 100% in cash.
• When you’re negotiating for an as-is property, it usually isn’t appropriate to try to get the seller to pay for certain repairs. If it’s included in the property description, the seller probably isn’t interested.
• These properties usually offer opportunities for value-add “fix and flips.” Investors buy a run-down property for less than its after-repair market value, fix it up, and attempt to sell it for a profit.

How does that differ from the traditional real estate sales process?

Selling Real Estate The Usual Way Goes Like This ...

Many traditional real estate contracts include inspection and appraisal contingencies. Since the deal isn’t 100% in cash, the bank wants to make sure it’s granting a loan on a reasonable investment. These contingencies can also give the buyer the right to back out of the contract if something unexpected pops up, or if the appraiser comes in at a value that’s higher than the sale price.

The biggest differences between selling real estate as-is and selling real estate on the retail market are:

• Sales price. Selling a property “as-is” typically has a lower sales price than listing a house in a more traditional manner.
• Time to close. It takes a traditional real estate transaction longer to close, since a third party (the lender) is usually involved.
• Realtor commission and other fees. Since lenders require inspections and appraisals, there are more fees associated with buying and selling traditionally.

Now that you have a general overview of what that means, let’s dive into who buys and sells these types of properties.

Why Would You Sell a House or Rental Property As-Is?

There are plenty of reasons why someone would sell a house or rental property as-is, but they all have one common denominator: they aren’t willing (and/or able) to make repairs to the property before closing.

With that said, here are some common reasons people sell properties as-is:

• They received the property as an inheritance following the death of a loved one, and they don’t have the money or time to fix the property up to the market’s standard.
• They received a notice of default from the bank and are attempting to sell the home as a short sale to avoid bankruptcy.
• They don’t want to haggle with buyers over certain repairs.

So, whether it’s through neglect, inheritance from a loved one, or some other reason, the seller doesn’t have the time, interest, or money to fix it up and list it to people who are looking to move in immediately.

Pros and Cons of Selling Real Estate As-Is

Let’s look at the pros and cons of selling real estate as-is.

Pros

• Quick sale. The average real estate transaction takes 30-45 days to close after being sold. Repairs are one of the biggest reasons it takes so long to close. When you’re selling as-is, you can probably avoid many of those repairs.
• Less hassle. If you sell as-is, you won’t have to haggle with buyers over minor -- or even major -- repairs.
• Including an as-is clause might save you from potential legal issues down the line.

Cons

• Your sale price will almost definitely take a hit. Since buyers are being dissuaded from negotiating repairs, they’ll have to make those repairs themselves. That will cost you some money.
• Selling real estate as-is doesn’t mean you can avoid an inspection. The buyer can still cancel the contract for any reason at any time, and they can still come back and ask for repairs.
• It doesn’t protect you from all potential legal issues, nor does it mean you can sidestep your state’s disclosure laws.

What You Need to Know if You’re Buying or Selling Real Estate As-Is

If you’re an investor, what are the big takeaways from this article? If you’re selling real estate as-is, then you can avoid a slew of potential litigation issues, particularly in the case of rental property, and you can close deals at a much quicker pace. However, in exchange, you’re sacrificing a higher sales price. Houses that are sold in a more traditional manner might have more fees, but they also typically sell at higher prices.

 

 

 

 

 

 

Photo by Webdexter Apeldoorn from Pexels

 

When you are selling real estate, you want to get the best possible price. 

Duh.

In a red-hot seller’s market, that’s usually not a problem. But what about when the market starts to cool down?

A bump clause is a way a seller can continue to market a property until the buyer satisfies a specific contingency, such as selling their current house first. With this type of transaction, a seller can “bump” the original buyer if a better offer comes in.

In this article, we’ll examine how a bump clause works and its advantages for both buyers and sellers.

How a Bump Clause Works

Unless it is their first home, most buyers need to sell their current home before purchasing a new one. In these cases, the buyer makes an offer with a contingency that they sell the other home first.

If the seller accepts the bid and enters into a contract without a bump clause, the seller has to take the home off the market. No other bids will be accepted during the contingency period. A typical contingency period typically lasts between 30 and 60 days.

With a bump clause, however, the home remains on the market. If another buyer makes a better offer, the seller must notify the original buyer. Then that buyer has only a few days to waive their contingency or increase their offer.

Otherwise, the original contract becomes void. The seller returns the earnest money to the original buyer and proceeds with the new offer.

What’s the best timing for a bump clause?

In a hot real estate market, homes often sell without contingencies. For example, in the pandemic-fueled housing market of 2020 and 2021, many homes across the country sold above their asking prices with no contingencies other than the home inspection.

However, hot markets eventually start to cool down. Bump clauses allow sellers to accept an offer that may be below their expectations along with a way out if a better deal comes along.

On the other hand, a buyer can present an offer with bump clauses as a way to encourage a seller to accept a bid with a contingency.

Typically there are two different time frames for real estate bump clauses: the 72-hour bump clause and the 48-hour bump clause. Sellers and their agents use the set time periods as a negotiating tool to encourage buyers to act quickly.

The 72-hour bump clause. With this clause, the seller will keep the property on the market, providing the original buyer with a 72-hour first-right-of-refusal notice if a better offer comes in.

The 48-hour bump clause. This clause allows the original buyer a period of 48 hours to waive the contingency or increase their bid on the property.

If the buyer does not meet the time frame stated on the contract, the seller is free to move on to a second offer.

Interested in learning more? Check out our article Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned.

Other bump clause terminology you need to know

Here are some other terms you need to know when dealing with bump clauses in real estate transactions.

The no-bump bump offer -- A no-bump contract is just like it sounds. If the seller accepts an agreement with this wording, they cannot back out if a better offer comes along. The seller must take the home off the market and proceed with the sale.

The active offer with bump – This wording on a property listing means that the seller has accepted an offer and has the right to accept another offer.

CTG – You also might see the abbreviation “CTG” for “Contingent” in a property listing. This status means that the property is on the market until the seller learns that buyer has either waived or satisfied a contingency.

Advantages of bump clauses for sellers

Many real estate experts describe a bump clause as a kind of security blanket for home sellers. The main advantage of a bump clause is that it allows a seller to continue listing the home throughout the contingency period. The seller may get a cash offer or one without any contingencies.

However, in a cooling housing market, a better bid may not materialize. So, a bump clause protects the seller from losing out on a perfectly good offer. 

Advantages of bump clauses for buyers

Most home buyers cannot secure financing for a second home prior to selling their current one. But waiting to shop for a new home until your current one sells can be awkward at best. The bump clause is a good solution in a cool seller’s market.

Also, a bump clause may help convince a seller with an unrealistic home listing price to accept a reasonable offer.

Are there any downsides to bump clauses?

Sellers with bump clauses should be careful about jumping into a second “better” offer. After all, bigger isn’t always better. Ensure that the second buyer has good credit and mortgage pre-approval, or else you could be bumping a solid buyer for a less-qualified one.

Another potential problem is that some qualified buyers will stay away from contracts with bump clauses. They may prefer not to take the risk of getting bumped when their current home is about to sell.

It’s always a good idea to evaluate your local real estate market, weighing the pros and cons carefully before including a bump clause.

 

 

 

Photo by Andrey Storn on Unsplash

 

Any experienced investor knows that diversifying real estate investments is key to long-term success.

Many real estate investors get started with single-family homes (SFH) because the market is more accessible than commercial real estate or multi-family properties. This is a natural first step, but it shouldn’t be the last.

Expanding your portfolio to include different asset types lowers your overall risk. 

Not only should you buy different assets, but also spread those investments out across different markets. Any number of factors could wipe out home or real estate values in an area -- and you want to guard against that volatility as much as you possibly can.

However, diversifying beyond single-family homes will not guarantee profits -- nor will it fully ensure you won’t have losses. But for high-net-worth investors, it’s definitely the best route to take. 

In this article, we explain why.

The Benefits of Investing in Single-Family Homes (SFHs)

First, there are a variety of benefits to investing in single-family homes versus multi-family homes and other properties:

• Lower cost 
• Easy financing
• Easy to sell (even during the current COVID-19 pandemic, demand for single family homes is rising)
• Higher appreciation
• Better tenants (Many SFH renters are families who want to stay in one place and take better care of the property)

All in all, these points fall under the same general category: Easier accessibility. It’s simply easier to get started with a SFH than any other real estate asset type. That’s why so many real estate investors begin with SFHs.

As with any investing approach, it’s smart to start small and work your way to bigger properties. Buying one SFH is less daunting for new real estate investors than buying a multi-family property. After all, taking care of one tenant (or one family) is much easier than taking care of two or more. 

Most Royal Legal Solutions clients initially invest in SFHs and eventually branch out into industrial real estate, multi-family housing, retail, medical, and self-storage. Why? Because they begin to realize that all of their eggs shouldn’t be in one basket.

Different assets have different risk factors -- and sometimes, in real estate, different properties are complementary. If the demand for SFHs collapses and property values plummet across the nation, then the slack has to be picked up by apartment and multi-family properties (because people have to live somewhere, after all).

In addition to diversifying across asset types, it’s just as important to diversify across markets.

Locations, Locations, Locations: Don’t Get Tied Down in One Area

There are advantages to having your investment property near where you live. If anything goes wrong—say, your tenant gets locked out of the building or the power goes out—you can be there to offer hands-on assistance.

But spreading out your investments across different real estate markets is also important.

Concentrating your holdings in a particular city or area makes your entire portfolio subject to the fluctuations of local supply and demand. Even in the best areas, there are a number of factors that could seriously hurt real estate market values:

• A natural disaster (hurricane, flood, earthquake, etc) destroys homes and buildings. (Even if you have insurance, entire communities don’t easily bounce back).
• A major business/employer shuts down or relocates.
• Crime waves hit the area.
• The school system takes a nose-dive.
• Mismanagement of local government funds leads to major infrastructure issues (poorly maintained roads, bridges, etc).

Even if you own a variety of real estate asset types in a single location, you still aren’t as diversified as you could be. If you lived and invested in New Orleans in 2005, it didn’t matter if you owned a single-family home, a condo, a four-plex, a self-storage facility, and a corner convenience store—Hurricane Katrina would’ve dealt a massive blow to your portfolio (unless you were amply insured and looking to cash out).

Experienced real estate investors avoid over-concentrating in one particular asset class or location. If, instead, your assets were spread out across the entire continental United States, your portfolio wouldn’t have been affected quite as much.

High-net-worth investors know that a real estate portfolio with a range of asset types, spread out across different locations, puts them in a better position to withstand economic downturns and events like the COVID-19 pandemic and natural disasters.

Why Different Asset Types are Key to Diversifying Your Investment Portfolio

Dwight Kay, founder of Kay Properties and Investments, a national 1031 exchange investment firm, outlined an example of how a hypothetical investor can diversify a $500,000 investment portfolio across commercial and multifamily real estate with the potential for income and appreciation. The funds would be equally spread among these assets:

• An industrial distribution facility
• A dialysis center
• A multifamily apartment community with 300 units in the Southeast
• A self-storage facility in the Midwest
• A debt-free multifamily property in Texas

Kay says this hypothetical investor “has diversified her portfolio by both asset type and geography.”

The hypothetical investor has also avoided highly cyclical and volatile markets, like senior housing and buildings involved in oil and gas production.

Conclusion: Diversifying Your Real Estate Investments

When it comes to real estate investing, it’s easiest to get started with a single-family home. The cost is lower, the financing options are plentiful, and the tenants typically care more about general upkeep than a multi-family or apartment building. Naturally, that’s where many investors start.

However, as time goes on, it’s smart to diversify across different asset types. That includes:

• Multi-family buildings
• Self-storage facilities
• Distribution centers
• Convenience stores
• Medical centers

Not only is it a good idea to invest in different asset types, it’s also a good idea to spread those investments out across different markets. A number of factors could wipe out real estate values in any given market, and they aren’t always within your control (nor are all of them easily insured against).

Avoid cyclical, highly volatile asset classes, including senior housing and long-term senior care facilities, hotels, and real estate used in the production of oil and gas.  

Focus on diversifying your portfolio by buying different assets in different markets. Don’t get too caught up in solely buyings single-family homes in one market. Remember: the demand could disappear in just a few short years.

 

 

 

 

Photo by Anete Lusina from Pexels

In this article, we’ll teach you how to calculate cash-on-cash return—and why it’s one of the most important calculations for real estate investors.

Much of the real estate industry, including investors and agents, use this formula (sometimes called the equity dividend rate) as a quick way to analyze an investment’s cash flow.

More specifically, it calculates a percentage value based on how much money you’re making (or going to make) divided by how much money it takes to acquire the property.

We’ll go over what the metric tells you, as well as what it doesn’t tell you. It’s just as important to know when not to use this metric, because you don’t want it to influence you to make a deal that, upon more extensive review, actually isn’t that great. And, the next time a realtor tries to sell you on a property that has a “fantastic” cash-on-cash return, you’ll be better equipped to determine whether or not it’s as good as it sounds.

This should be one tool in a toolbox of other important metrics and formulas that you consider when looking at a deal. It shouldn’t be the only tool.

With that said, let’s get started.

How to Calculate Cash-on-Cash Return

Cash-on-cash is a simple formula: income earned divided by cash invested. It’s a pre-tax figure that takes place over the course of a year.

The easiest way to explain it is probably through an example. 

Let’s say you buy a single-family rental property for $300,000. You put $60,000 down and the seller covers closing costs. The property has a tenant inside who’s renting the place for $2550/month. After factoring in all of your expenses (mortgage, maintenance, insurance, etc), you find out the property generates about $300 per month in positive cash flow. 

You also need to factor in vacancies and subtract that from the total cash flow. For the purposes of this short example, let’s assume that this property is located in an in-demand area and the tenant has no plans on leaving any time soon. For reference, though, the average vacancy rate is about 6.8%. It’s up to you to know what it is in your market area. 

So, to find out the cash-on-cash return, you’d take the income earned, $3600* and divide it by the cash invested, $60,000.

The result is 0.06, or 6%. You could also use a cash-on-cash return calculator, to make it easy.

All in all, the formula (or formulas, for each variable)  looks like this: Annual Pre-Tax Cash Flow / Total Cash Invested

Annual Pre-Tax Cash Flow = (Gross Rent + Other Income (think parking spaces, pet fees)) - (Expenses + Vacancies + Mortgage Payments)

*It’s a yearly figure. The property generates $300/month, so you multiply $300 by 12 to get $3600.

What Does Cash-on-Cash Return Tell You?

So, what does 6% even mean, then? Is it good or bad? Should you invest or skip out?

Compare Different Investments

Cash-on-cash returns give you a fairly easy way to compare different investments, as long as you know how much income they generate and how much they cost to maintain. For example, let’s say you find another tenant-occupied property that’s selling for $190,000 and generates $205/month in cash flow. On the surface, it doesn’t seem like it would be very easy to compare the two. Your gut might tell you that the less expensive property is the better investment, or your gut might tell you that the property that generates the most income is the best investment.

What’s worse is that, in the real world, there are more than just two properties that look like this (and a lot of them don’t cash flow).

So, let’s calculate the return of the second property. In order to purchase the rental, you put 20% down. In this case, that’s $38,000. After closing costs, you end up paying $42,000.

The result is .058, or 5.8%. That means this property, according to this formula, is a slightly worse investment than our first example.

Play Around with Leverage

But what if you only had to put 10% down? And let’s imagine you get a good deal on private mortgage insurance so it only costs $50/month. Your annual pre-tax cash flow is $155/month or $1,860/year. After closing costs, you spend $23,000 to acquire the property.

So, annual pre-tax cash flow ($1,860) divided by total cash invested ($23,000) gives you 0.08, or 8%. Using leverage, you completely changed the numbers.

This way, you can easily compare different investments -- even if changing one factor might change a lot of factors. Maybe you’re looking at investing in a REIT that’s projected to grow at 10% annually -- you might skip out on the rental property entirely.

What Does Cash-on-Cash Return NOT Tell You?

No Equity

One thing you may have noticed, though, is that in our examples above, the tenant covered 100% of the mortgage payments. This formula ignores the fact that every time you make a mortgage payment you’re building equity. Instead, we’re only looking at how much money you have in your hands at the end of twelve months.

If we go back to our first example, with the tenant paying off a $300k property, the equity alone is desirable for many real estate investors.

No Taxes

Furthermore, taxes can completely throw off a deal. What if the taxes for the $300k property are the same as the taxes for the $190k property? If you’re just looking at this one metric, you’ll completely ignore that important variable.

No Risk Adjustment (Leverage Looks Great)

Finally, what if you could buy a $200k property that generates $1,000 in annual cash flow by only putting 3.5% down (with the seller covering closing costs)? Total cash invested is a whopping $7,000, and your cash-on-cash return is 14.2%.

Buy, buy, buy! Right?

What if you got such a great deal on that property because it’s a waterfront that’s expected to be literally underwater in five years?

This formula makes leverage look fantastic. You might as well go out and scoop up as many rental properties as you can for as little money down as possible—but anyone who has watched some investors’ entire fortunes get wiped away by a downturn or some other unexpected event knows otherwise.

Conclusion

Cash-on-cash return, or equity dividend rate, is pre-tax cash flow divided by total cash invested. It tells you how much money you have in your hands at the end of the year.

It’s an easy way to compare different investments, particularly different rental properties and commercial real estate investments—and even stocks and bonds.

It isn’t perfect, though. The formula ignores equity, doesn’t take taxes into account, and makes leverage look greater than it is.

Make sure that, when you’re using this formula, it isn’t the only formula you’re relying upon.

One of the best ways to build wealth is with rental properties. And one of the first things new real estate investors need to learn about is how to calculate rental property cash flow. Running a profitable investing business depends on it.

In fact, I can spot a new investor a mile away. These guys think cash flow is simply “income after expenses.”

They'll say something like "My mortgage is $1,500 per month and the rent is $1,100, so I'm going to be making $400 every month.” 

Sadly, this investor is about to lose money. There are a lot of unforeseen expenses they aren’t thinking about.

Let’s take a closer look.

What is Cash Flow, Exactly?

Cash flow is used to figure out just how much income rental real estate such as apartments, duplexes, or commercial buildings can generate. A property can have either positive cash flow or negative cash flow. Positive cash flow, in case you haven’t guessed, comes with more income than expenses. That’s what we want.

Boosting the cash flow of a property could make your business sustainable in the long term. You want a strong return on investment (ROI), but is that the same thing? Not really: Cash flow measures how much cash an investment property will actually generate, whereas ROI measures total value over time.

Ok. So why do so many investors get the cash flow forecasts for their properties wrong?

4 Factors That Make Up The Flow

Long-term expenses make up the true cash flow return, and these expenses differ based on the property type. They aren’t the same every week and every month and every year. That’s why it’s important that you can calculate the average.

To calculate what it will cost your company to maintain a specific property, you need an accurate, long-term record of what has been spent on repairs, vacancy rates, property management services, and property insurance.

Repairs. In one month you may not have any repair costs. Does that mean your repair costs over three years will be zero? Of course not. You have to budget for those inevitable nuisances like broken circuit breakers or crappy old toilets. 

Vacancy Rates. What’s the worst thing about a great tenant? They can’t live there forever, that’s what! When they vacate your rental, you need to make some changes to keep it attractive for new tenants. It may take time for you to market the property for prospective new renters. This process includes making repairs, screening tenants, and getting them signed. For a normal market, your vacancy rate can sit at 8 percent.

 

Property Management. Even if you claim to be a jack of all trades, managing your property all by yourself may be difficult. Budget for property management. Property managers charge for screening and signing a lease agreement with new tenants. However, you should pay yourself if you insist on managing your property yourself. Saving money is an admirable goal, but remember—this job is a lot harder than looks.

Property Insurance. Connect with an insurance company to rates for properties in your market. There are all kinds of ways to insure your rental units; for example, "rent default insurance” is used to protect against late rent. If your tenant stops, insurance pays for it. That’s a great example of optional insurance that will affect your cash flow forecast.

Using the “50 Percent Rule.” The “50 Percent Rule” says that landlords should expect operating expenses to be 50 percent of gross income. This rule can help you figure out how profitable your rental property will be. NOTE: Mortgage or loan payments are not part of these expenses; they come out of the other half. (See how you can get in trouble by not estimating your costs up front?) 

Get Organized!

Learn how to accurately forecast both your expenses and your revenue before you get into the rentals game and you'll save yourself a lot of headaches. The best way to monitor cash flow is to prepare a cash flow report. 

With this report, you are able to see the cash you received and cash paid out at the end of every month. Tracking on a weekly or daily basis may be a good idea depending on the size of your portfolio (assuming you have a knack for spreadsheets!). If you’re buying a property, try to get this information—in as much detail as possible—from the previous owner.

In fact, if they CAN’T provide it, that’s a red flag.

Proper cash flow forecasting matters for every rental property investor. You should know how to measure the rate of return for your property. Investing in properties with positive cash flow is the key to your success as an investor.

Ready to learn more? Check out The Rental Property Asset Protection Checklist.