Profit Centre #3: Cash Flow

It’s generally accepted within the industry that you should plan to make some cash-flow on a rental unit each month. But many don’t.

That’s because, out of the rent, they have to pay not only their mortgage on the property but also the taxes, the insurance, perhaps the utilities (depending on the lease contract), perhaps a strata fee (if it is a condo or townhouse), repairs and maintenance, and—here’s the big one many people forget about—cover the rent if there is ever a vacancy. If the vacancy rate is a typical 5%, then 1/20 of every months’ rental needs to be set aside to cover one full month’s vacancy.It is not surprising that many landlords abandon the notion of monthly cash-flow, banking primarily on the appreciating value and mortgage write-down to make their investment viable.Experts call that gambling! They preach the critical importance of the third real estate profit centre, cash-flow, and advise every rental unit should produce positive cash-flow every month, even if only $50 or $100.
 
This means that landlords need to be extremely careful in calculating income and expenses, price their rental units accordingly, allow for the unforeseen maintenance and vacancy costs, and monitor carefully each unit.

The most obvious is a home with a rental suite, so let’s use that as an example. Suppose you have a home that you would otherwise pay $2000 a month to rent. Now, let’s say your monthly mortgage payment is $1500, your taxes are $300 and your insurance is $100, for a total of $1900 in costs. (Your mythical landlord, being smart,would be making $100 cash flow a month less the vacancy and maintenance cost allocation.) Now, suppose you have a basement suite in that home for which you can get $800 rent. Of course, with a basement suite, those initial $2000 costs may have increased to $2300. But now you offset that $2300 with the $800 rent and you are left with out-of-pocket expenses of just $1500 per month, $500 less than you would otherwise pay for that property. Essentially, you have created a monthly cash-flow of $500.

This is not an unrealistic scenario. And it well illustrates the value of starting your financial building block with a home that has a suite. When rent 2 own clients ask me whether they can get a home with a suite, I strongly encourage them to do so, and allow them to use the suite income to help them pay their monthly rent.I mentioned above the value of a “revenue generating” element in a property. That can be much more than simply a home with a suite, though, as there are many other ways to create income from a residence, at least if it is a free-hold property.

One of my mentors teaches us to “animate” properties, i.e., build in ways to increase their income potential. Does the property have an extra parking pad? Rent it for RV storage. Does the property have a toolshed in the back yard? Rent it as a storage unit. Does the property have two single garages instead of one double garage? Rent out one as a workshop, or rent it out to your tenant. Do you think your tenant in that basement suite might want cable TV? Rent them a portion of your contract instead of making them get their own. 

Over winter, I need a place to park the minibus I use for my other business, West Adventures, and one of my R2O clients is in a property that has lots of extra parking space. So a little bit of their monthly rent is being offset with minibus storage.

Any income-generating opportunity from your primary residence that brings your monthly costs down to below what you would otherwise have to pay market value for, to rent, can be seen as positive cash-flow. And that can become an ingredient in building long-term financial stability.

It’s another reason to get into home ownership, if at all possible.