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Calculating the Cash Flow Value of Cash Flowless Real Estate

October 17, 2017 by Lazy Man 15 Comments

Every month I write about my Alternative Income, which is a measure of “passive-ish” cash flow. For a long time, I was completely confused about how to value our real estate accidental “empire”. The three properties don’t make money each month, which is to say that make any cash flow. Usually real estate investors are looking to make money each month (have positive cash flow).

Housing prices were up and so was he.

We’re not typical, because our real estate was mostly accidental. My wife and I bought independently near the market highs and then we moved across the country for different career opportunities. Selling at a loss wasn’t a good option, so we became landlords and refinanced them with a double HARP refinance opting for 15-year fixed mortgages (better rates – yay!) at market lows in 2012. We added another property around 2011. These aren’t big expensive properties… they are condos worth around $500,000 in total.

It seems fairly easy to say, “zero cash flow property is worth $0.” However, my goal is to measure progress in growing cash flow. It doesn’t feel very good to say that they are $0, but then magically become worth $3000 a month when the mortgages are paid off. That’s too Boolean even for the computer scientist in me. It’s really a perception problem:

“It’s all about the exposure, the lens I told her. The angles were all wrong now.”

Paramore – Brick By Brick which is great financial advice!

We could do either of the following and get cash flow out of them:

  • Refinance the remaining principle into 30 year fixed mortgages. This lowers the monthly costs and we could pocket several hundred dollars a month.
  • Sell the property with the most equity and payoff 1.5 properties. We aren’t going to sell a property just to make the math work better when I calculate cash flow. Also, paying off half a property doesn’t lead to better cash flow number.

The angles were all wrong because neither of them is a very realistic scenario. In fact, they are very unrealistic. Neither of them really assessed the progress we were making to owning them outright.

The “Right” Formula to Calculate the Cash Flow Value of Cash Flowless Real Estate

I don’t know if there’s a “right” formula, but I created what I feel is right for our situation. I’d love your thoughts on this, especially if you are into real estate investing.

The formula is:

(EquityInAllProperties/TotalValueOfProperties) * ((MonthlyEstimatedZillowRent + MonthlyActualRent)/2)

Let’s make that a little prettier:

Cash Flow Rent Equation

(This is my first time trying to format a formula for the web, so I apologize if it isn’t as good as it could be. I only promised it would be a little prettier.)

The left side of the equation is meant to calculate the percentage of equity you own. When you first buy, you might put down 20%. Over time the hope is that this grows to 100% and you own the property completely. I calculate the value of the properties using Zillow, but use whatever you feel comfortable with. That’s the denominator. You can subtract the amount you have outstanding from your mortgage statement from that total value calculation to get the equity you have in the properties (the numerator.)

The right side of the equation is meant to calculate the monthly rent that you’ll be getting from all the properties. I average the Zillow expected rent because we give some great tenants a bit of a discount. It makes me feel a little better about the numbers to know that we can and will likely raise the rent to market levels eventually. You could, of course, skip this. For us the numbers are close to the same anyway, so it isn’t a big difference.

As a real life example, we own 43.1% of the total value in our properties. It’s up 36.4% from earlier this year. This is due to the value of the properties increasing as well as the mortgages getting paid down. Our expected rents from all the properties (factoring Zillow) is $3225.

Essentially, the left side tells you how much of the pie you own. The right side tells you the size of the pie. Multiply them together and you get a number representing the amount of virtual cash flow you own. Over time both numbers will grow. That makes tracking the progress of this number.

You’ll want to take out HOAs, taxes, insurance, and some reasonable amount for maintenance, etc. As commenter Jaime below mentions, it could be more or less than 25% of your cash flow. I think I’ve estimated it to be closer to 20% of what I project, but 25% is a good safe number. I like to take it out of the right side of the equation, but the order of operations doesn’t matter mathematically.

MLM Corner

I thought I’d test out something a little different today and cover multi-level marketing in a section called MLM Corner. The goal is raise visibility of how such companies operate. I’m getting a lot of feedback from you that MLMs are crowding your Facebook and you are sick of it. I’ve covered quite a few such as Youngevity, It Works, and Le-Vel. Typically MLM Corner will highlight other perspectives of MLM from around the web.

I’d like to kick it off with MLMs and Me from Oakes’ of Righteousness. Rachel walks the reader through the cold recruitment (not sales) pitch from a friend who hadn’t talked to her in two years. She covers a lot of MLM in a fairly brief personal story. If you are interested in this kind of thing, it is worth reading (and sharing.)

Filed Under: Real Estate Tagged With: cash flow

Time to Buy that Vacation/Retirement Place?

December 14, 2011 by Lazy Man 9 Comments

Two weeks ago, I lamented about how I bought my home at the wrong time. In fact, I’m technically upside-down on the place. That means that my mortgage is slightly more than the place is worth. So why do I ask the ridiculous question in the title? … because my wife and I are seriously considering it.

Before you reserve me a padded room and form fitting white jacket, let me explain myself. We are looking at two huge factors driving this decision

  1. An Ideal Time to Buy

    Historically, it is a great time to buy. You’ve probably heard that more than a few times in other places, but it is true. The cost of buying a home in many places are very low and the interest rates are low. When I bought in 2005 before, interest rates were historically low (who knew that 5.875% would look high now?), but real estate prices were high. I think the pendulum has swung in the other direction with real estate prices (in some areas) and interest rates are much lower now.

  2. We May be “Retiring” in 8 Years

    You noticed that retiring was in quotes up there? Good. It seems like retirement means different things to different people. I even wrote about it once: What’s Your Definition of Retirement ? By some definition, when I’m working on my side businesses, I feel like I’m retired.

    This definition of retiring would be my wife collecting her pension with 20 years in the military and finding the next hit boy band. (We joke about that last part.) However, a military pension, plus online income totals a decent sum of money – even without traditional retirement vehicles like Roth IRAs, 401Ks, and the like.

    That sum of money is relative though. It doesn’t buy much of a glamorous lifestyle in San Francisco. In a few areas of the country, it can go a long way. So we naturally looking to extend our dollar since the majority of our income won’t be tied to any physical location.

The Straw Man Plan

We thought a bit about where we’d want to live. Texas has a cheap cost of living, but I’m not sure you can really put this Boston couple in Texas. They’d probably find my allegiance to the Patriots quite annoying. We do have a couple of friends there, so we aren’t ruling it out. We also looked at Nevada as it is a nice tax-friendly place with good weather. We can’t rule that out either. However, the leading place we’ve been discussing is the Jacksonville area. We have a few sets of friends there and perhaps we can convince another friend (half the couple seems very interested, the other half… not so much). Jacksonville seems to be a nice tax-friendly area, free of snow, with some relatively cheap real estate.

The other area we are considering is Newport, Rhode Island. This is more of personal thing with us as we both have ties there. In fact, my wife and I got married there. There are two keys for us considering Newport. It is “The Hamptons” of New England in the summertime. That makes it a great place to rent out in the summer. In the winter, Newport dies down. However, there’s the military base that has a Naval War College, which means you get a lot of Navy cadets (I hope that is the right term for them), who make great tenants… especially when I’m married to someone who can pull rank on them ;-). Lastly, Newport, RI is close to our Massachusetts roots and family.

Between the two places, we’d have a place to spend our winters away from the snow (very important to the wife) and a place to vacation in the summer. The idea would be to buy the Newport one first because it would be easier to rent until we are ready to retire. We’ve all the heard the horror stories about renting out Florida real estate right?

There are a pile of holes in the plan, but it is serving as a good straw man for now.

The Risks

Of course, there are always risks to consider. Here are couple of the ones we are looking at:

  1. Current Real Estate Holdings

    As I mentioned above, I’m upside-down on my current rental property. However, it is occupied and while the cash flow isn’t positive, it it is barely negative. A couple of cost cutting measure like our cable bill or my cell phone bill and apply those savings towards the property and cash flow problem is quickly resolved.

  2. Do We Have the Money?

    We have a two year emergency fund right now. My wife’s military job is quite possibly one of the most secure jobs in the nation right now. It is enough to for the two of us to live comfortably on. There are ups and downs in my income. When I have a contract job to supplement my online income, it is enough for the two of us. However, when I’m between contracts or just focusing on my side businesses, those businesses are just enough to support me in our area. (We could always move to a more affordable place in a hardship, of course.)

  3. What if We Can’t the Rent the Place

    This is the single biggest issue. Having an empty rental property is really a drain on the cash flow. We really need to put our homework in and understand the real estate market in Newport completely. We’ll have to go on the Navy base and see what the options are for renting to the cadets.

I’m sure there are more risks that we haven’t considered. Perhaps you can help me fill in the gaps in the comments below?

The interesting thing is that as we were considering this, I opened up this month’s issue of Smart Money and James B. Stewart’s Common Sense column mentions buying that vacation/retirement place now… for the exact reasons were were considering… he’s looking for “something that’s cheap and likely to appreciate.”

Filed Under: Real Estate, Retirement Tagged With: cash flow, Jacksonville, Newport

Investing in… Websites?

April 24, 2009 by Lazy Man 5 Comments

Every now and again, traffic growth on Lazy Man and Money hits a plateau. I’m not overly concerned about that for two reasons:

  • I rarely try to write for traffic. Okay, every now and again I try to write a sensational title for fun and amusement. However, in general I write whatever is on my mind with regard to money.
  • I think hitting plateaus is natural. I think of it a little bit like dieting. Some weeks you lose more weight and other weeks it just stops. If you stick with it over time, chances are you’ll see results.

Nonetheless, hitting plateaus does trigger the thought, “what could I do differently to bust out of this?” My thoughts often turn to ideas of finding effective advertising. My problem with that is measuring what’s “effective” is difficult and time consuming for me. I think about ways that I could create other products, perhaps an eBook, that might garner attention. Unfortunately, I don’t have the time for that. I have the money to outsource it, but when you read Lazy Man and Money, I’m going to assume you want to read my words, not something I outsourced. So to this day, I don’t have a solution.

If I get out the Lazy Man brand though, possibilities start to open up. I can outsource writing for other blogs or websites and effectively be an editor. However, can I duplicate the success of Lazy Man in those topics? I think it’s possible, but it would require building a lot of relationships. That’s where time becomes a factor again. Also, if my writer is writing about basket weaving am I, a non-basket weaver, going to be able to build those relationships? I don’t think so. I think you have to show that you know what you are talking about before others take you seriously.

That said, I see a lot of advantages to investing in websites. If you know what you are doing, they can deliver cash flow. My experience is that the cash flow is fairly erratic. However, like an volatile investment, it seems to become more predictable when looked at over the long term.

The big problems with investing in websites? The time and/or money to keep the cash flow can be a little bit like being a landlord. If you want it to be truly passive, you can hire more people, but it may end up costing you as much money as you making. What’s the point in that? The other big problem with websites is one of diversity. Search engines can often be the lifeblood of a website, and one search engine, that shall not be named, is at the point where it create and destroy entire incomes overnight. That’s a huge concern.

Peter Lynch says to invest in what you know… and I know websites and blogs. Now if I can come up with a couple of solutions to the above questions, I’ll have interesting diversification in my investment portfolio.

Filed Under: Investing Tagged With: Blogging, blogs, cash flow, ebook, Investing

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