# What is a cash flow positive rental property



## financeguru (Jan 18, 2010)

Hi, 
I am looking to rent out my condo as we upgrade to a new house.This would be the first property i rent out. I often hear of the term that if you want to rent out a property - it should be cash flow positive. What exactly does this mean? Also typically is there any rule of thumb that one should budget for repairs per year? (15 year old condo, in relatively good shape).

For discussions sake here is what the numbers would look like for my condo:

Rental income:1300 per month OR 15600 per year
Expenses: 
Mortgage (amortized at 35 years - current rate prime -.75): 577 per month (of which 359 is interest and 218 is principle approx.)
Condo fees: 372 per month
Taxes+insurance: 165 per month
Net expenses per month: 1114 (577+372+165) per month OR 13368 per year
This means that on a yearly basis my property would generate 2232 dollars of cash per year.

At the end of the year i am on the hook for taxes against my rental income, however since condo fees, interest portion of mortgage and taxes(?) are tax deductible, which is (372+359+165)*12 = 10756, therefore they would diminish the amount of taxes which i am paying. so the taxes that i would pay end of year will be as follows: (15600-10756)*.43 (my marginal tax rate)= 2082 dollars.
So on a nutshell, i would have 2232-2082 =149$ of positive cash flow for the year.

Is the above correct? It seems that if i have to do any repairs/alterations, my positive cash flow could quickly turn into negative cash flow....
Are there any other ways of increasing cash flow?


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## Potato (Apr 3, 2009)

financeguru said:


> Mortgage (amortized at 35 years - current rate prime -.75):


First off, these numbers are for a very low interest rate (1.5%!), what happens over the long term (e.g., 5-8% interest rates)?




> Is the above correct? It seems that if i have to do any repairs/alterations, my positive cash flow could quickly turn into negative cash flow....
> Are there any other ways of increasing cash flow?


Then you should include a budget for repairs 

For a condo, there won't be too much (the maint fee should handle most major issues), but the appliances and fixtures will need to be replaced/repaired, the walls retouched/painted, plus cleaning between tenants... 

Also, there will be some vacancies, so you need to budget for that as well.


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## Dana (Nov 17, 2009)

Here is what I consider cash flow positive:

If you deduct mortgage payments, tax payments, utilities paid by you, condo fees, insurance premiums, a management fee (I use 10% of the rent), vacancy allowance (5% in my neck of the woods) and maintenance allowance (I use 5%) from the gross monthly rent and still have money left over, the cash flow is positive. 

Even though you will be managing the rental yourself, always deduct the managment fee because (a) you should be paid for your services, and (b) if ever you are not able to manage the property yourself this is the approximate cost of hiring a property manager (either permanently or until you can sell). 

Although you will not draw down your vacancy and maintenance allowance each month, make sure they are accounted for so that when you do have a vacancy or a deliquent tenant or a maintenance issue, the money is available. 

Work on the assumption that your mortgage rate will increase (and in your case, your condo fees), but your rental income will not (at least not at the same rate) will the property still be cash flow positive?

Check with your condo corp and make sure it is within their by-laws that you can rent out your condo. My dad owned a condo in FLA for a while and the condo corp rules stated that the condo board had to approve any potential tenants. They had very high standards and made it very difficult for condo owners to rent their units. 

Also, I am told that some Condos in Toronto have in-house property management people who will find you a tenant, collect rent and manage your unit on an ongoing basis - for a fee. 

Using my criteria, the condo would not be cash-flow positive.


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## Berubeland (Sep 6, 2009)

How did you come up with your monthly rental number of $1300 per month?


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## the-royal-mail (Dec 11, 2009)

From someone who has been through what you are considering, I feel this is a bad idea. All that work on your part to gain $150 a year? Nah, just sell the place now and move on. Dealing with tenants is a very trying experience to say the least, even if you have a rental management company on your side. They take fees too, meaning you would be in the red even though those fees are tax deductible.

potato makes a good point about the interest rate and repair costs. I would also mention the rent...you may not be able to get the rent you think you'll be able to get and you will have to pay for repairs and painting and such, these things crop up anytime.

Down the road, you will need to sell the condo and doing so with tenants in place can be very difficult. If dire straits occur in your life, having that condo against your name will be a HUGE burden.

A friend told me to live my life with a clean slate in reference to this and he is right. Don't get mixed up with tenants if you don't have to. Sell the condo now while the getting is good.


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## financeguru (Jan 18, 2010)

Berubeland said:


> How did you come up with your monthly rental number of $1300 per month?


I came up with the number looking at similar listings on MLS for same sq. footage condos in my building. Similar condos are going for 1350, so i'm being a bit conservative.

The-royal-mail / Dana
Thanks for your feedback, based on which, i am considering selling the condo, my closing for the new place is May 5th, so i still have some time. It seems that a rental is only going to be cash flow positive if you have a multiple unit housing. The major reason i was thinking of holding on to it was for capital appreciation.... historical 4-5% increase in the market value would get me quite a bit of capital gain, due to the leverage factor. The way i was thinking of it, is that i can take the equity in the condo and invest it the stock market or i could hold onto the condo for capital gains. I don't believe i'll make as much in the stock market, because the cash would be non leveraged and also since i have a pretty big investment portfolio already, i wanted to also diversify my risks by having two different investment classes.

Royal-mail, have you sold your property, if so did you end up ahead.


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## Berubeland (Sep 6, 2009)

I am going to play devil's advocate here for a second.... 

First of all positive cash flow is what INVESTOR's look for when BUYING an investment property. You already have this property and you have enjoyed a lot of the use of it.

For a condo to break even you are already doing well. 

Second if you sell you are going to have to pay a chunk of RE estate fees etc. 

Third If you do have to do upgrades they stay with the property... so increase your capital value so not really fair to count that out of cash flow.

Fourth as a rental business you will have to have an home office, office supplies etc. which you get to claim which may in fact decrease your income. 

Further look ahead several years....

Inflation will increase your rental income but not your mortgage payments

Eventually the condo will be completely paid off by other people in which case the cash flow will be excellent as you retire probably. 

Capital appreciation will hopefully increase the value.... 

The only thing you have to decide is wether the PITA factor works for you. Rental real estate is a good investment but it is a high PITA factor of dealing with the tenants. People who will rent this kind of condo are generally very decent. But inevitably you will have to repaint etc. 

If you do decide to go ahead.... make sure you get them to fill out a rental application, get copies of valid photo ID and SIN card. Get actual paystubs or copies of their bank statements with preauthorized payments if they are paid that way. Landlord references and job letters are pretty worthless IMHO. Ask for post dated checks. Also be prepared to wait a month or so for them to move in. Nobody decent is looking for a place the day they are moving and the larger the place the more time ahead people look. So if someone comes the last few days of the month forget it unless they are from out of town. 

It might sound like this is stupid advice but you would be shocked by how many people don't even get their tenants to fill out a rental application.


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## the-royal-mail (Dec 11, 2009)

Hi finance, I understand what you are saying. You are thinking really long term and you are very optimistic. I can't see a 4-5% increase per year happening every year. I don't know how secure your job is and that of your presumed partner, but s happens and when it does this type of liability can bankrupt you. I know, I've been there. Two mortgages is very difficult for the average person or family to maintain. You will not have a good tenant that pays on time every single month. There will be good ones and bad ones. With the figures you presented, the bad will outweigh the good over the long term. IMHO.

As to whether I sold and came out ahead, that's a bit of a loaded question.  Firstly, yes, in the 4 years I owned the property I did sell it for about 5% more than I paid. It took me about 9 months to sell, at a very critical time of life when finding work was proving to be impossible. I nearly lost it all. When I finally did sell (praise the Lord), the difference between what I still owed on the mortgage after I paid the RE agent and lawyers was nice cash in my pocket, but it doesn't tell the story of how much I shelled out the previous 4 years in condo fees, taxes, repairs and rental mgmt fees to get to that point. I was very lucky to sell apparently and this was a quality tower condo in a very nice part of Mississauga, very clean, new (2003) bldg. In the final analysis I wouldn't say *I* ended up ahead, it was a lot of work and stress and PITA as mentioned by berube and the middlemen like the banks with their interest, city taxes, condo fee surplus reserve, RE agents, rental mgmt and lawyers seemed to be the only ones who made any money.


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## Berubeland (Sep 6, 2009)

*You will not have a good tenant that pays on time every single month.*

Even with all my negative experiences and time in the business I dispute this. 90% of tenants pay their rent every month. 

If I look at the townhouse property I manage which is filled to the brim with lower class tenants...

About 70% pay on time every month.... the further 20% pay every month but late and the other 10% skip or are evicted. The selection process there is extremely loose. The units are kept filled.... period.


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## the-royal-mail (Dec 11, 2009)

Thanks berube, great figures!

If I may, 90% seems quite low to me. In the OP's case, he is depending upon that money every month to be able to keep paying for the costs of running the property. Chasing the few who don't fulfill their obligations would surely tip the scale against anyone buying or keeping rentals to invest, unless they have lots of cash and can afford to take that hit of missing rent every month.

As for my comment, what I actually meant was you will not ALWAYS have good tenants that pay on time every month.


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## financeguru (Jan 18, 2010)

Berubeland said:


> If you do decide to go ahead.... make sure you get them to fill out a rental application, get copies of valid photo ID and SIN card. Get actual paystubs or copies of their bank statements with preauthorized payments if they are paid that way. Landlord references and job letters are pretty worthless IMHO. Ask for post dated checks. Also be prepared to wait a month or so for them to move in. Nobody decent is looking for a place the day they are moving and the larger the place the more time ahead people look. So if someone comes the last few days of the month forget it unless they are from out of town.
> 
> It might sound like this is stupid advice but you would be shocked by how many people don't even get their tenants to fill out a rental application.



Absolutely, i intend to be very diligent....Berubeland since you seem to be in this business what are the pros and cons of hiring a Real Estate agent to try to rent this out? Can i not just put this up on MLS myself as a private rental or do i have to use a Real Estate agent, i was talking to one agent and he said his cut would be half (or full, cant remember) the amount of the first rental payment. Is it just the PITA factor that prevents one frome doing it or is there something else that i'm mising?

Royal-Mail, your circumstances do seem to be a bit different than mine, but then who knows life conditions do change suddenly. My job is stable, and my line of work (management consulting/project management) is a skillset that transfers well across industries. My wife works for the provincia government, so stable job there. As DINKs, we save about 30% of our income. We also don't carry any auutomobile/credit debt.About the 4-5% increase, agreed, might not get it, but i'm not worried. Even 2-3% gets me a decent return and i'm not in the camp that thinks RE will tank suddenly.


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## Berubeland (Sep 6, 2009)

Absolutely, i intend to be very diligent....Berubeland since you seem to be in this business what are the pros and cons of hiring a Real Estate agent to try to rent this out? Can i not just put this up on MLS myself as a private rental or do i have to use a Real Estate agent, i was talking to one agent and he said his cut would be half (or full, cant remember) the amount of the first rental payment. Is it just the PITA factor that prevents one frome doing it or is there something else that i'm mising?

Please please hire a rental agency to rent out your property or even do it yourself before you hire a real estate agent to rent out your property. First of all in Toronto in 2008 they rented only 50% of all the properties they listed for rent as per the TREB stats. This on a 90 day listing. MLS website is great for selling but poor for renters. 

A good rental agency will pay for all advertising, show the property, have the ability to do credit checks, know the landlord & tenant laws in your province etc. They will also offer a guarantee that if the tenant does not pay the rent they will evict them for you for free except for court costs. 

A real estate agent has a fundamental conflict of interest in that they make the most money when they sell your property. They really don't give a crap. 
This year I evicted some tenants for impaired safety, they were disgusting hoarders you couldn't even walk into their place. In any case they found a real estate agent to give them a new place. He went to their house to sign the lease AND STILL TOOK THEM AS TENANTS. I couldn't believe it. Several times I have heard owners say to me that they suspect the real estate agent picked horrible tenants just to convince them the rental market is crap and they should sell. Not to mention that they don't advertise anywhere other than the MLS which most tenants don't even know about. 

You can also do it yourself, if priced properly and the place is decent it should be no problem. You can even just post it in your laundry room or with security for May/June and see what happens. It really isn't that hard as long as you are available to show the place. 

I cannot emphasize enough to trust your gut reaction to people. If you get the feeling like their story doesn't add up or you just don't like them go with that feeling. Any time I have gone against that feeling I have regretted it. Even if they seem nice and you don't have a logical reason not to like them. People that look way ahead of time are superior to those that rent last minute so feel free to wait a month.


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## Potato (Apr 3, 2009)

There were one or two helpful agents in our most recent housing search, one of whom was an agent but also worked for a rental agency... Pretty much all the others were useless. The standard fee IIRC is 1 month's rent, which is split between the listing agent and the "buyer's" agent (if there is one). That's a pretty low fee compared to what they get for a purchase/sale, so they just don't put the effort in. They wouldn't put up proper details/photos on MLS, they wouldn't return phone calls, they'd skip out on appointments to view properties if a potential sale came up, and worst of all, one of them drew up the lease for the landlord, and it was completely illegal and nonsensical. I told the landlord to just go to staples and pick up a fill-in-the-blanks lease document.

If you insist on holding on and renting out the condo, do it yourself or hire a real rental agency.


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## real_money (Feb 16, 2010)

I could not agree more with Berubeland and Potato.

A real estate agent was trying to rent out my neighbours house for $2,500 a month because my neighbour moved out of town for a contract. What he was doing was very sneaky. The sign on the lawn said for rent in very small font, you had to walk right up to the sign as squint to see it. So everyone that was passing by and calling him thought it was for sale.

I told my neighbour this when I ran into him. He asked the real estate agent to add a sign to the existing sign that states FOR RENT in large letters. It took the agent another two months to add those words. It was great advertisement for the agent I am sure he got many calls. I saw many people stop in front of my neighbour’s house and write something down; I can only assume that is was the phone number. 

Bottom line: No one cares about your money as much as you do.


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