Real Estate Investing For
Cash Flow First
And Appreciation Second
4 Questions:
• Has the market reached a bottom?
• Are prices headed up or down?
• Will there be more or fewer distressed
houses in the future?
• What effect will the government’s actions
have on real estate?
1 Answer:
No one knows.
But This is OK Because In Real
Estate You Invest On The
Numbers…
When
you BUY.
When
you sell.
More On This In A
Second
But First…
What About Stocks and
Bonds?
Stocks
In May of 2010 the Dow Jones Industrial Average was at 10,500.
In May of 2000, ten years earlier, it was at 10,500.
10 Year US Treasury Bonds
Is a 2% to
3% return
acceptable
to you?
What effect
will the
ballooning
national
deficit
have?
10 Year Municipal Bonds
Is a 3% to 5%
return,
without
appreciation,
acceptable
to you?
Are any
municipalities
at risk of
defaulting?
Back To Real Estate
• The tremendous upheaval in the real
estate markets has created once-in-a-
generation opportunities.
• But with the wrong investment strategy
you will miss out on properties that yield
annual CASH FLOWS of 3% to 5% in
addition to the possibility of appreciation.
What Do We Mean?
Making money when you SELL…
Buying a
property and
hoping the price
will go up in the
future.
What Do We Mean?
Making money when you SELL…
This strategy only
works if you can
time market lows
and highs AND if
real estate
appreciates during
the time that YOU
own it.
Prediction = Risk
Instead, invest based on what you
know TODAY
What Do We Mean?
Making money when you BUY…
• As soon as you buy, you profit from rental income that is
higher than your mortgage and operating expenses.
• You know from day one what your profit will be.
• You don’t have to risk predicting appreciation. It will be a
very welcome increase on your investment.
For Example
• 3 bedroom, 2 bath house. 2,181 Square Feet, Listed at
$149,000.
• We offer $143,900.
• Sold for $453,000 in 2006.
• 20% down, $28,700.
• 5.25% interest rate for a
mortgage of $635/ month,
or $7,629/ year.
For Example
• Rentfor comparable properties in the same neighborhood
are $1,400 per month, or $16,800 per year.
• 45% of rent you receive will pay for expenses such as
property management, insurance, property tax, maintenance,
and vacancy and rent collection loss. Without a property
management company your expenses are 35% of rents.
• 45% X $15,960 in rents = $7,323.
How Do We Know If This Is A
Good Investment?
“Cash-on-Cash Return”
✔ (To measure profit)
“Debt-Service Coverage Ratio”
✔ (To measure risk)
What Do These Numbers Mean?
How Do We Derive These?
Let’s Do Some Math…
Our investment (Down payment) of
$28,700 yields an annual profit of $1,612.
Measuring Profit
“Cash-On-Cash Return”
What Do These Numbers Mean?
• The Cash on Cash return allows you to
measure the annual investment return
of your down payment against other
investments such as stocks and bonds.
• This does not even factor in possible
future appreciation.
How does our 6%
return compare?
Measuring Risk
“Debt-Service
Coverage Ratio”
What Do These Numbers Mean?
The Debt Service Coverage Ratio (DSCR) measures monthly rent vs. monthly
mortgage. It allows us to gauge the margin of profits to cover our expenses.
Negative Break-even Positive
Cash Flow Cash Flow
>
.83 < 1.00 1.21
Would You Buy This Property?
• 6% Annual return on • $770 Monthly net
your investment income to cover a
(Down payment). $635 monthly
mortgage.
This is money you make when you BUY.
And IF it appreciates…Bonus!
Why Buy Now?
Unsustainable
historic low
interest rates
that WILL rise
to control
inflation.
So what?
Small Changes In Mortgage Rates Have A
Dramatic Effect On Investment Returns
Interest Rate Effect on Mortgage
$16,000
$15,000 $15,449
$14,000
$14,088
$13,000
$12,774
$12,000
Mortgage
$11,000 $11,511 Net Income
$10,000
$10,307
$9,000
$8,000
5.0% 6.0% 7.0% 8.0% 9.0%
Interest Rate
A 2% rise in interest rates increases
your annual mortgage by $2,000!
Small Changes In Mortgage Rates Have A
Dramatic Effect On Investment Returns
Cash on Cash Return
10.0%
9.3%
8.0%
6.3%
6.0%
4.0%
3.2%
2.0%
0.0% -0.1%
5.0% 6.0% 7.0% 8.0% 9.0%
-2.0%
Interest Rate
-3.5%
-4.0%
A 2% rise in interest rates decreases
your cash-on-cash return by 6%!
What We Offer
• Pre-screened properties that offer positive
Cash-on-Cash returns and safe Debt
Service Coverage Ratios.
• “Turn Key” services for financing,
purchasing, and property management.
Contact us for current properties:
ragnar@timsmithgroup.com
Turn
on
the
CASH
FLOW
Contact us for current properties:
ragnar@timsmithgroup.com