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The Keys to Investment Cash Flow Anaysis

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The most successful property management professionals are effectively using investment cash flow analysis to better manage the growth of their business. Leonard Baron, real estate professor and writer for Zillow, will break it down and share his straightforward rental property cash flow metrics so your business can become a cash cow.

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The Keys to Investment Cash Flow Anaysis

  1. 1. The Keys to Cash Flow Investment Analysis
  2. 2. AppFolio Web-Based Property Management Software Complete Solution Includes: • Property management and accounting • Online rent collection (free) • Prospect / guest card tracking • Marketing • Website • Payment processing • Online applications • Resident Screening So You Run A More Successful Business
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  4. 4. Keys to Cash Flow Analysis Making Smart Decisions with Proper Due Diligence on Investment Properties Instructor – Leonard Baron, MBA • Long Term Real Estate Investor • Owns and Manages Many Properties • Long Term Real Estate Consultant • Past Real Estate Lecturer at San Diego State University • Teaches or Guest Lectures at SDAR, SDCLL, USD, UCSD, The Career Compass, Qualcomm, etc. • MBA at USC, Undergraduate from James Madison University Learned Many a Hard and Expensive Lesson and Hopes to Help You Learn those Hard Lessons Without Having the Financial Pain He’s Experienced! ProfessorBaron.comDueDilligenceInstitute.org
  5. 5. Polling Question Time for A Polling Question! When investing in real estate, should you target the properties with the best location, location, locations, in your area?
  6. 6. Categories in Due Diligence Process What We’ll Learn in the Course Today Projecting a Targeted Property’s Cash Flow is One 3. INVESTOR RENTAL CASH FLOWS of the Important Steps in Making Smart Real Estate Investing Decisions! REMEMBER: All of the Applicable Due Diligence Steps Are Vitally Important to Helping You Make Better Decisions!
  7. 7. Investment Real Estate Investment Returns Come From Either…. 1. Appreciation in Value - Doesn’t Pay Bills and Cannot be Counted Upon; or 2. Positive Flow – Does Pay the Bills! To-Do: Pencil Out – “Pro-forma” Your Deal Cash Flows with Conservative Estimates to Calculate a “Cash On Cash” (COC) Return. Once You Know Your COC Returns, Is It a Good Deal?
  8. 8. Polling Question Time for A Polling Question! What are the long term rates of return on real estate investments? • 10% •0% •Negative % •It Depends
  9. 9. Investment Rental Real Estate Let’s Look at What Other Assets Produce Before We Learn How to Calculate Real Estate Investment Returns. If You Invested Your Hard Earned Cash Into:
  10. 10. Are you Making a Smart Financial Decision? Taking Money Out of Your Financial Assets… [CDs, Bonds, Stocks = Low to High Risk but Liquid] Presumably Earn Interest, Dividends and/or Appreciation in Value and Hopefully Increases Your Wealth Over Time Is Placing That Money Into Real Estate… [Real Estate = High to Extremely High Risk and Liquid] Going to Earn You More Wealth at a Similar Risk Level for a Similar Time Horizon?
  11. 11. Let’s Proforma a Deal:Fair, Moderately Priced Property – Project Investment Returns Moderately Priced Property $40,000 Equity Cash to Close – Is Far More Important Than the Price That’s What Really Counts! “In the Black!” Conservative Cash on Cash Returns! 6.15%
  12. 12. Prize Property! Investment Rental Real Estate Fancy Prize Downtown Condo $150,000 “In the Red!” -8.12%
  13. 13. Rental Properties – Asset or Liability?“It Will Cash Flow and be aGood Deal Because I’ll PayAll CASH….” Not True!The Right Question:What is the COC %? $40,000 $150,0003 Vital Items inProjecting Returns:1. Cash Down payment2. Cash Flows/Income - % Returns3. Risk – Are the Numbers Good? Your Instructor Learned About Fancy Prize Properties the Hard Way! 6.15% -8.12%
  14. 14. Key Takeaway: Not All Real Estate is Equal “Where Do You Want to Invest Fair Deals Cash on Cash: (Excluding Prizes!) Your Hard Earned Cash? Single Family 2% - 5% Prize Properties Are No Prize! Town Homes 3% – 6% Target The Location – of the Moderately Priced Condos/Apart 4% – 8% BoringProperties •10%++ - Sounds TGTB True! But It All Depends On What You Decide to Acquire!
  15. 15. $150,000 Nominal Yearly Cash Flows3 Town Homes 1 Condo Cumulative 10 Year Cash Flows + 5% OCC3 Town Homes $113,612 1 Condo ($131,961) Difference = $245,579
  16. 16. So How Long Until the Prize Turns Positive? Year 10! Fancy Downtown Condo 10 Year Cumulative Negative = ($117,593)Note: Lots of Assumptions Herein
  17. 17. So How Long Until the Prize Turns Positive? 22! RENT/ EXPENSE INCREASEPROPERTY OPERATIONS 3.00% STATEMENT Year 11 Year Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 $ 3,091 $ 3,184Monthly Rent - www.Zillow.com, www.craigslist.org or other Source $ 3,279 $ 3,378 $ 3,479 $ 3,583 $ 3,691 $ 3,802 $ 3,916 $ 4,033 $ 4,154 $ 4,279Vacancy & Collect ion Loss 5.00% $ 155 $ 159 $ 164 $ 169 $ 174 $ 179 $ 185 $ 190 $ 196 $ 202 $ 208 $ 214Effective Gross Rent $ 2,936 $ 3,025 $ 3,115 $ 3,209 $ 3,305 $ 3,404 $ 3,506 $ 3,611 $ 3,720 $ 3,831 $ 3,946 $ 4,065Operating Expenses Management Fee Percent age = 8.00% $ 235 $ 242 $ 249 $ 257 $ 264 $ 272 $ 281 $ 289 $ 298 $ 307 $ 316 $ 325 Insurance $ 40 $ 42 $ 43 $ 44 $ 45 $ 47 $ 48 $ 50 $ 51 $ 53 $ 54 $ 56 Maint enace/ Repairs/ Ot her $ 101 $ 104 $ 107 $ 110 $ 113 $ 117 $ 120 $ 124 $ 128 $ 132 $ 135 $ 140 HOA $ 672 $ 692 $ 713 $ 734 $ 756 $ 779 $ 802 $ 826 $ 851 $ 877 $ 903 $ 930 Miscellaneous/ Lawncare/ Ut ilit ies $ 34 $ 35 $ 36 $ 37 $ 38 $ 39 $ 40 $ 41 $ 43 $ 44 $ 45 $ 47 Propert y Taxes Increase %/ Year 2.00% $ 559 $ 570 $ 581 $ 593 $ 605 $ 617 $ 629 $ 642 $ 655 $ 668 $ 681 $ 695Total Operating Expenses $ 1,640 $ 1,684 $ 1,729 $ 1,775 $ 1,822 $ 1,871 $ 1,921 $ 1,972 $ 2,025 $ 2,079 $ 2,135 $ 2,192 $ 1,296Net Operating Income $ 1,341 $ 1,387 $ 1,434 $ 1,483 $ Nominally Positive Finally! 1,533 $ 1,586 $ 1,639 $ 1,695 $ 1,752 $ 1,812 $ 1,873MORTGAGE PAYMENT AND CASH FLOWSInt erest Rat e 4.2500% $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845Amort izat ion Years 30 $Monthly Cash Flow (COULD BE NEGATIVE) (549) $ (504) $ (458) $ (411) $ (362) $ (311) $ (259) $ (205) $ (150) $ (92) $ (33) $ 28 $Annual Cash Flow (COULD BE NEGATIVE) (6,583) $ (6,050) $ (5,499) $ (4,930) $ (4,342) $ (3,736) $ (3,110) $ (2,463) $ (1,796) $ (1,107) $ (396) $ $337 337Cash on Cash (Annual Cash Flow / Tot al Equit y) --4.79% BE NEGATIVE COULD -4.40% -4.00% -3.59% -3.16% -2.72% -2.26% -1.79% -1.31% -0.81% -0.29% 0.25% But Still Cumulative Negative Below!This spreadsheet is protected - the passcode "duediligence" will unprotect it.www.ProfessorBaron.comCumulative Negative $ (130,056) $ (142,608) $ (155,237) $ (167,929) $ (180,667) $ (193,437) $ (206,218) $ (218,993) $ (231,739) $ (244,433) $ (257,051) $ (269,566) ($269,566) Negative Cash Flows at Bottom – Includes 5% Opportunity Cost of Capital
  18. 18. RENT/ EXPENSE INCREASEPROPERTY OPERATIONS 3.00% STATEMENT 23 Year Year 24 Year 25 Year 26 Year 27 Year 28 Year 29 Year 30 Year 31 Year 32 Year 33 Year 34! Year 34Monthly Rent - www.Zillow.com, www.craigslist.org or other 4,539 $ 4,407 $ Source $ 4,675 $ 4,816 $ 4,960 $ 5,109 $ 5,262 $ 5,420 $ 5,583 $ 5,750 $ 5,923 $ 6,100Vacancy & Collect ion Loss 5.00% $ 220 $ 227 $ 234 $ 241 $ 248 $ 255 $ 263 $ 271 $ 279 $ 288 $ 296 $ 305Effective Gross Rent $ 4,187 $ 4,312 $ 4,442 $ 4,575 $ 4,712 $ 4,854 $ 4,999 $ 5,149 $ 5,304 $ 5,463 $ 5,627 $ 5,795Operating Expenses Management Fee Percent age = 8.00% $ 335 $ 345 $ 355 $ 366 $ 377 $ 388 $ 400 $ 412 $ 424 $ 437 $ 450 $ 464 Insurance $ 57 $ 59 $ 61 $ 63 $ 65 $ 67 $ 69 $ 71 $ 73 $ 75 $ 77 $ 80 Maint enace/ Repairs/ Ot her $ 144 $ 148 $ 152 $ 157 $ 162 $ 167 $ 172 $ 177 $ 182 $ 188 $ 193 $ 199 HOA $ 958 $ 987 $ 1,016 $ 1,047 $ 1,078 $ 1,111 $ 1,144 $ 1,178 $ 1,214 $ 1,250 $ 1,288 $ 1,326 Miscellaneous/ Lawncare/ Ut ilit ies $ 48 $ 49 $ 51 $ 52 $ 54 $ 56 $ 57 $ 59 $ 61 $ 63 $ 64 $ 66 Propert y Taxes Increase %/2.00% Year $ 709 $ 723 $ 737 $ 752 $ 767 $ 782 $ 798 $ 814 $ 830 $ 847 $ 864 $ 881Total Operating Expenses $ 2,251 $ 2,311 $ 2,373 $ 2,437 $ 2,503 $ 2,570 $ 2,639 $ 2,710 $ 2,784 $ 2,859 $ 2,936 $ 3,016Net Operating Income $ 1,936 $ 2,001 $ 2,068 $ 2,138 $ 2,210 $ 2,284 $ Mortgage Paid Off !!!!! 2,360 $ 2,439 $ 2,520 $ 2,604 $ 2,690 $ 2,780MORTGAGE PAYMENT AND CASH FLOWSInt erest Rat e 4.2500% $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ 1,845 $ - $ - $ - $ -Amort izat ion Years 30 $Monthly Cash Flow (COULD BE NEGATIVE) 91 $ 156 $ 224 $ 293 $ 365 $ 439 $ 515 $ 594 $ 2,520 $ 2,604 $ 2,690 $ 2,780 $Annual Cash Flow (COULD BE NEGATIVE) 1,095 $ 1,877 $ 2,684 $ 3,517 $ 4,377 $ 5,265 $ 6,181 $ 7,126 $ 30,239 $ 31,246 $ 32,285 $ 33,357Cash on Cash (Annual Cash Flow / Tot al Equit y) - COULD BE NEGATIVE 0.80% 1.37% 1.95% 2.56% 3.18% 3.83% 4.50% 5.18% But Still Negative! 21.99% 22.72% 23.48% 24.26%This spreadsheet is protected - the passcode "duediligence" will unprotect it.www.ProfessorBaron.comCumulative Negative $ (281,949) $ (294,170) $ (306,194) $ (317,986) $ (329,508) $ (340,719) $ (351,574) $ (362,027) $ (349,890) $ (336,139) $ (320,661) $ (303,337) ($303,337)
  19. 19. RENT/ EXPENSE INCREASEPROPERTY OPERATIONS 3.00% STATEMENTYear 35 Year 36 Year 37 Year 38 Year 39 Year 40 Year 41 Year 42 Year 44!44 Year 43 Year $ 6,283 $ 6,472Monthly Rent - www.Zillow.com, www.craigslist.org or other Source $ 6,666 $ 6,866 $ 7,072 $ 7,284 $ 7,503 $ 7,728 $ 7,960 $ 8,198Vacancy & Collect ion Loss 5.00% $ 314 $ 324 $ 333 $ 343 $ 354 $ 364 $ 375 $ 386 $ 398 $ 410Effective Gross Rent $ 5,969 $ 6,148 $ 6,333 $ 6,523 $ 6,718 $ 6,920 $ 7,128 $ 7,341 $ 7,562 $ 7,788Operating Expenses Management Fee Percent age = 8.00% $ 478 $ 492 $ 507 $ 522 $ 537 $ 554 $ 570 $ 587 $ 605 $ 623 Insurance $ 82 $ 84 $ 87 $ 90 $ 92 $ 95 $ 98 $ 101 $ 104 $ 107 Maint enace/ Repairs/ Ot her $ 205 $ 211 $ 217 $ 224 $ 231 $ 238 $ 245 $ 252 $ 260 $ 267 HOA $ 1,366 $ 1,407 $ 1,449 $ 1,493 $ 1,537 $ 1,584 $ 1,631 $ 1,680 $ 1,730 $ 1,782 Miscellaneous/ Lawncare/ Ut ilit ies $ 68 $ 70 $ 72 $ 75 $ 77 $ 79 $ 82 $ 84 $ 87 $ 89 Propert y Taxes Increase %/ Year 2.00% $ 899 $ 917 $ 935 $ 954 $ 973 $ 992 $ 1,012 $ 1,032 $ 1,053 $ 1,074Total Operating Expenses $ 3,097 $ 3,181 $ 3,267 $ 3,356 $ 3,447 $ 3,541 $ 3,637 $ 3,736 $ 3,838 $ 3,943 Will You Still Be AliveNet Operating Income $ 2,872 $ 2,967 $ 3,065 $ 3,167 $ to Celebrate This Day? 3,271 $ 3,379 $ 3,490 $ 3,605 $ 3,724 $ 3,846MORTGAGE PAYMENT AND CASH FLOWS Your First True Positive Cash Flow!!!!!Int erest Rat e 4.2500% $ - $ - $ - $ - $ Your First True Positive Cash - $ - $ - $ - $ - $ -Amort izat ion Years 30 Flows!!!!! Hopefully Youll Be Alive to Celebrate This Day! $Monthly Cash Flow (COULD BE NEGATIVE) 2,872 $ 2,967 $ 3,065 $ 3,167 $ 3,271 $ 3,379 $ 3,490 $ 3,605 $ 3,724 $ 3,846 $Annual Cash Flow (COULD BE NEGATIVE) 34,463 $ 35,605 $ 36,783 $ 37,999 $ 39,253 $ 40,547 $ 41,883 $ 43,261 $ 44,683 $ 46,149Cash on Cash (Annual Cash Flow / Tot al Equit y) 25.06% BE NEGATIVE - COULD 25.89% 26.75% 27.64% 28.55% 29.49% 30.46% 31.46% 32.50% 33.56%This spreadsheet is protected - the passcode "duediligence" will unprotect it.www.ProfessorBaron.comCumulative Negative $ (284,041) $ (262,638) $ (238,987) $ (212,938) $ (184,331) $ (153,000) $ (118,767) $ (81,445) $ (40,835) $ 3,273 $ 3,273!
  20. 20. Key To Remember… Penciling Out Your Deal is a Must Some Properties Take Decades to Turn Positive That is No Way to Invest! If You Don’t Learn This… You’ll Figure that Out Around the Time You Retire
  21. 21. Proforma Wrap-Up – How Do You Determine How Do You Determine… Rents Craigslist.org, Call on Signs, MLS, Real Estate Professionals Vacancy Tough to Do – Apartment Building Surveys, Drive Area, Call Listings Maintenance and Repairs Expenses Estimate 1% Per Year SFRs More Than Condos (HOA Fees Cover Some Condo Costs)
  22. 22. Polling Question Time for A Polling Question! Now you know how to pencil out a real estate deal, approximately what percentage of real estate investors know how to do this calculation? 90% 75% 50% <20%
  23. 23. Proforma Wrap-Up – How Do You Determine How Do You Determine… Budgtets, Property Taxes + CFDs (Mello Roos) and Add-ons – Property MLS Listing and County Website Insurance Call an Agent: SFR, Condo/HOA-6, Home or Landlord, Earthquake, Flood Mortgage &PMI Talk to Lender
  24. 24. The Next Three Slides Just Show MySimple Spreadsheet That You CanDownload and Use On Your OwnYou Can Download This Foolproof Spreadsheet –ProfessorBaron.com –Chapter 3 – Rental Property Cash Flows
  25. 25. You Will Download This Foolproof Spreadsheet – ProfessorBaron.com – Chapter 3 – Rental Property Cash FlowsPage 32Textbook <=Note
  26. 26. Moderately Priced Property
  27. 27. Prize Property Will the Below Knowledge Save You some Money in Life? You Invested $150,000 for That Negative CF?
  28. 28. Wrap Up and Recommendations 1. Pencil Out Your Deal With Conservative Numbers 2. Pass On Negative Cash Flow Deals 3. Prize Properties are NO Prize! 4. Buy Properties You Plan to Keep for a Lifetime 5. Do Your Due Diligence, It Is Time Consuming, But Less Time Consuming Than Unwinding a Bad Real Estate Deal! Due Diligence Guides at: ProfessorBaron.com DueDiligenceInstitute.Org

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