Cash Flow Will Not Make you Rich

Cash Flow Will Not Make you Rich

I came across the following article or blog last week and the title was, Cash Flow Will Not Make You Rich, caught my attention and I thought it would be good reading for everyone. I agree and disagree with the emphasis of this article.
I agree, cash flow alone will not make you rich. Investors in 2004 thru 2006 proved this as they made tons of money flipping properties that were structured with negative cash flow. Many put very little down and since the properties appreciated so quickly, they were making amazing returns. See, the great thing about investing in real estate is that you gain appreciation based on the property value, not your initial investment. If we ignore the boom period and look at investing into a property with reasonable positive cash flow with historic appreciation, the investor could expect to make 15% on their money. Do that over and over with some vertical moves and you can create wealth.
I disagree because cash flow may not make you rich but it certainly should be an important ingredient for most investors. Look at those investors who bought near the end of the bubble or soon after the bubble broke. If they had very little cash flow or were negative a fair amount, many unfortunately lost the property to foreclosure or short sale. So I believe that the typical investor should seek positive cash flow. In fact, I think that ALL investors should first address cash flow before moving onto other aspect of the investment. Right now, with the right property, that cash flow can make you around 6% on your money; and that is better than the bank. Because you have positive cash flow you should be able to ride the market out and once property values begin to appreciate again, you can expect that return to improve. So it’s a balancing act and I believe that my performance can help you weigh out different scenarios.


Have we hit Bottom?
Everyone keeps asking me, have we hit the bottom yet? As I have said in the past, I don’t think we’ll know it until after the fact, but looking at the data, it looks like we’re at the bottom. In prior months, if we saw a 4 plex sell at $215K and an identical 4 plex came on the market a month later, that sales price would be $215K or lower. Well, we have now seen that exact scenario, but the 2nd 4 plex sold for over $230K. The short sales and foreclosures are still dominating the market and there are many more coming down the pipe, but I think the market has found that sweet spot and I think we just might be there. Years ago I said that our inventory levels would have to get to or below a year’s worth of inventory. Well, guess what, we’re there. So all the indicators are there. I’m looking forward to seeing the data over the next couple of months.

Boise Rental Market
As predicted our vacancy did drop this last week and I further predict that it will improve throughout the remainder of the month. Things are still looking pretty good.

(Click to enlarge)

First Rate Property Management’s 2010 Vacancy Rate

Below is First Rate Property Management’s vacancy graph. Let me explain what we count as vacant. If the property is vacant, but the tenant is paying rent, we count it as vacant. If the property is vacant and we have executed a lease and the new tenant just hasn’t moved in yet, we count it as vacant. As you can see, our vacancy spiked an entire percent in the last week. That is because most tenants vacate at the end of the month. I suspect that next week will fall back down to the 4% level.

(Click to enlarge)

Market Conditions

With the rental market improving, First Rate Property Management has had to make some changes in our policies and procedures. For most of the last decade, it has mostly been a renter’s market and our staff has made the appropriate adjustments. With the rental market now improving, we are now making adjustments that more favor the Landlord. Below are some examples of some of these changes.
Move-in dates: If the property was available on the 1st and the tenant couldn’t move in until the 21st, we mostly accommodated them and started the lease on the 21st, which means that the owner lost 3 weeks of rent. We have to allow some time for a proper turnover, but regardless of when the tenant wants to move-in, we will be requiring them to start paying rent sooner.
Move-in incentives: Incentives are not offered as quickly or for as much as we have in the past, with some exceptions based on trend analysis. However, we are putting controls on this. For easy math, let’s just say that the tenant is to receive a $300 move-in credit. We are now applying this $300 move-in-credit from the time the tenant is approved or when the property is ready to be occupied; where in the past, we applied it to the date they wanted to move in. So if you couple the flexibility we offered on move-in dates plus a move-in incentive that didn’t apply until after the move-in date, the owner was losing many rent days.

Renewals: Our lease has an automatic rent increase built in it. For the past few years, we have waived the increase and used it as an incentive or as good will, to get the tenant to stay and renew. We are now back to reviewing all upcoming leases and invoking the automatic rent increase to those paying under market rent.


In summary, I think these changes will improve our client’s bottom lines and I also think it will entice tenants to move-in sooner.

Boise Vacancy Rates

The 2nd quarter vacancy and rental reports from the SW Idaho Chapter of the National Association of Residential Property Managers were just released. As you can see, the vacancy for single family homes is just a mere 2.5%. I haven’t seen that since 2001. It’s a great sign that our surplus inventory of single family homes have mostly been consumed. However, the survey showed a vacancy of over 6% for small multi-family buildings. First Rate Property Management has been fairly steady at 3 to 4%, so I was surprised to see that figure as high as it was. But I think it explains why I’ve seen some of our multi-family units not move as fast as I wanted them to or at least at the rental price that I thought would work. All-in-all, I am still pleased with the current market conditions.

(click image to enlarge)

Boise Average Rents

The SW Idaho Chapter of the National Association of Residential Property Managers posted their 2nd quarter rent survey. Below I have posted the results. With vacancy so greatly improved, I would’ve expected rents to have increased. If you have any questions, please feel free to contact Tony@FRPMrentals.com or simply post to this blog so that everyone can see your question and the response.

(click image to enlarge)

Summertime Busy

As we’ve mentioned, summer is our busiest time of the year. As of today, we haven’t received that many notices to vacate for August. So unless they come in by the truck-load next week, August should post up some good numbers.