The secret to investing in Real Estate is Cash Flow.
If you get some cash out each month/quarter, you’ll be able to continue to invest. If not, you’ll be stuck nursing along your one property and never make any progress towards your own personal Belize. Because I hear and read a lot of new investors saying “I can never find any cash-flowing properties” I’m going to explain how I do it. I’ll grant that I have two advantages, a basic knowledge of the Edmonton rental market and an intuitive ability to manipulate databases.
That said, I’m going to try and lay it out as simply as possible, so that you can do it too. First, before the actual steps, an important concept for those who aren’t familiar with REIN. It’s the 10% rule. In a nutshell, take the predicted (or actual if you have a good comparable) rent, multiply it by 12 (months in the year), and divide it by the purchase price. If this measure of the gross income divided by the purchase price is between 8% and 10%, keep it. If it’s less, forget it. If it’s more than 10%, send it to me….. Here we go….
- Pick a city, town, or area. It doesn’t have to be anything special. I happened to choose Edmonton’s North East. There are many others you could choose; each will have cash flowing properties, it’s just up to you to find them. Choose a style of property (e.g. townhomes) and select a number of bedrooms (2-4 in my case). All of this is just to keep the total number of properties you’re considering at any one time to something manageable (i.e. less than 500). If you’ve got a defined limit to your down payment, use that as a max. I tend to use $100,000 or $130,000 as a minimum to keep out the crap (empty lots, trailers, storage lockers, and timeshares). Remember, we’re going for volume. You’ll definetly miss at least one good place, but you’ll make up for it be considering three times as many. I also only consider one source at a time. Last night I used MLS.ca and then comfree.com. There are many good sources, but only use one at a time. It’ll help you keep your sanity. *Tip* Use Internet Explorer 7 or Mozilla Firefox 2 (or higher) because they allow you to use tabs. Tabs are a very important part of my surfing style. Mozilla is nice because if you crash it, it should automatically re-open the sites you were looking at before it crashed.
- (Optional Bonus Step) Print out my cheat sheet. Check out RentOMeter for your area to get a simple idea of what a 2, 3 or 4 bedroom in your area works for. Actually zoom in and see what numbers it shows. Because it seems to only return ~105 properties the numbers can be a little sketchy. I tended to use $1000-1200 for a two bedroom, $1200-1400 for a three bedroom and $1350-1700 for a four bedroom. N.B. Only use these numbers for the next step. They are not a substitute for finding actual comparable rentals.
- Start surfing. Pick your area, style, beds, and max/min price. Every time you find one that looks kind off ballpark (even a little), or looks interesting, OPEN A TAB. Open lots of tabs. You like tabs. They’re your friends. Remember, back in step 2 you got my lovely cheat-sheet. That means the $1200-1400 rental window will (at 8-10%) allow you a purchase price of $144,000-$210,000. You do the math (or use the cheat-sheet) for 3 and 4 bedrooms. Between MLS and Comfree I ended up with ~50 tabs. Be cautious, because too many tabs will crash your browser. You can do a page of listings, sort all the tabs using step 4, and then go on to the next page of listings, but I’ll leave that up to you.
- Screen your tabs for some semblance of reality. Here is where Ctl+Tab is your friend. Hold the Ctl key, tap the Tab key and you’ll flip between tabs. (Alt+Tab will switch you between applications. Cool, eh?) This is a quick second look to see if you saw the # of beds correctly, noticed interesting things like assumable mortgages or possible basement suites or garages, and a quick estimated rent comparison. Here I took my 50 tabs down to ~25.
- Print them out. As I was printing, I weeded out another ~5 that didn’t quite fit what I’m searching for (which is not even necessarily what I’m looking for), and ended up with about 20 hard copies of listings. Comfree gives a nice amount of information, while with MLS you’re going to end up going to your Realtor for more information if it’s one of your favorite three. If possible, avoid printing more than one picture, for two reasons. First, it’ll save ink and paper. Second, you want to make a decision based on economic fundamentals, not on an emotional attachment to a pretty house. I use a single picture to establish how many units are in the building, and if the rooms are above or below grade.
- Pick up one listing in your hand. Put the others out of reach. Use RentOMeter (or your tool of choice) and enter the details as best you can to get a good guesstimate. Take the high, median and low numbers. Write them on the listing. Apply the 8-10% rule. If the median rent is close to meeting the rule and your gut feeling says yes (or you have an excellent property manager, Realtor, sub-trades, and know you can get top rent), keep it. Otherwise, stick to the rule and toss it. Repeat until you’ve gone through your pile.
- Pick your favorite three (based on numbers or something special). Put them face down (which will be the top of the pile). Rank the rest by percent (for the median rent). Keep the top 10, throw the rest into a “discard” pile. Now you’ve got a pile of 10 likely prospects to put into the REIN Property Analyzer. Personally, I have two that made it out the other side…but that was just the first screen. I’m going to use some better information (more accurate rents, insurance and maintenance numbers) and see what happens. Most importantly, don’t cry if none of them make it past the rules. Let them go. If they really love you they’ll come back to you. Not actually, but you’ll be happier in the long run. Rather than the month you’ll spend trying to make the sketchy property cash flow, you’re going to spend two 8-hour days doing exactly what I explained above and find some amazing properties!
These topics are covered in more depth in Don Campbell’s Best Selling Books, including Real Estate Investing in Canada: Creating Wealth with the ACRE System
14 comments
Chris
Great question Lesly,
It’s important to have a good idea of what type of properties you’re looking at, and in what areas. I started by identifying some properties that fit the model and cash flowed, and then moved on to mortgage related information. This was while I was working on my investor binder, and I was pretty sure I’d qualify for most products.
The best advice I can give it to get your own house in order. Get your binder done, check your credit, and make sure you’re ready to take action. Get a mortgage broker on side (send them a copy of your binder to review and start to pre-qualify), and find a Realtor who can help you. Comfree can be a great source for properties that don’t need a Realtor. Then start writing offers. You’ll learn a lot by reviewing the quickstart materials, getting your binder ready, and investigating your first few properties.
Lesly
Chris,
Wonderful information for a newbie like me.
Just finished the quickstart program and started analysing the areas first. Even i drove around the spotted areas.
Now, I to start the action, Should i first identify the property and start searching for realtor, mortgage and insurance agents? or I start with identifyig them first and the narrow down the properties having a positive cash flow.
Regards,
Lesly
Chris
Hi Nick, You’re very right that Rent-O-Meter has some kinks to get ironed out. There seemed to only be 100-150 properties in their whole Edmonton system, so it’s important to use other websites too. I’ve worked in the industry so I’m usually just looking for confirmation of where I think numbers are, but rentedmonton.com, rentfaster.ca and gottarent.com can all be good sites to get more information.
– Chris
Nick
Hey Chris, great article! Just one question: You say in step #2 to actually zoom into the results of rentometer. I tried the website for Winnipeg and although it said the results were based on 102 rentals in the area nothing came up on the map. I thought maybe Winnipeg was too small of a market so I tried Edmonton and only 3 – 2 bedroom properties showed. Is there something I am missing? Thanks in advance!
Chris
Shaune, you’re very right. I designed this and the resource to work as simply as possible. When I find a property that cash flows with a standard 80/20 down payment, it’ll be a dead ringer with a little more down payment (or a larger reserve fund).
I screen a little harder than some people, but I’m just picky like that.
Shaune
Chris
The spreadsheet is useful and similar to one I use. The amount of the down payment, of course, certainly influences the cash flow. With all the different types of mortgages available on the market and various down payment options, these factors need to be considered up front when surfing for properties. I have extra columns in my spreadsheet to reflect the amount of a down payment. I work with the mortgage amount as a basis for cash flow. The different down payment options then translate into the purchase prices that are in the range. It saves a calculation step since purchase price is the info on the listing. It also shows me the down payment amount required on the spread sheet. If I am limited to my down payment funds I don’t spend time on properties that are out of my price range. Conversely, by putting a bit more down (JV money of course) an alligator can turn into a cash flow property.
Shenan
Yea i’ve seen your posts in REIN and noticed you’re not a member of it. i do like your insights and the perspective you bring to the table so i hope you keep writing because i’m always reading. i’m very new to the real estate game as well and can learn something from every one. keep up the good work and thanks again
Chris
Thanks Shenan! I’m glad you’re finding it useful because you’re exactly the type of person I was writing for. I’m kind of a wierd person in REIN because I’m an investor newbie personally, but I’ve been involved in property management, and seen my parents and some others be successful in REIN. Hopefully you check back often (or add the RSS feed), and the other stuff I write will be as useful!
Shenan
Hi Chris, I ran into this website by reading the post you had made on myreinspace.com and i have to tell you it is absolutely brilliant. I myself am a new REIN member and attended the quckstart Vancouver in Fb/08. The one thing i find difficult within myself is to put things into perspective as to where and how i would go about taking my first steps, as i have no previous experienced with real estate. Your article on six steps to finding cashflow creek has made it very clear for me on where to begin and given me easy to understand steps that i can follow, also the cheat sheet you have has actually explained it much clearer to me how to find certain things, I can’t thank you enough for the article and i want to sincerely thank you for doing what you do THANK YOU ……absolutely brilliant
Caroline
Thanks for the tips on how you do it…I dont know even how to do the tab….its a a big help…I am a newbie..thanks again
caroline