By: Jay Long
Q : Dear Jay, I own nine rental houses in a medium sized mid-west city. I’ve been renting each of these houses for a $100 - $200 positive monthly cash flow for the last couple of years. Each month I collect more in rents than I pay in house payments, but there is never any money in my checking account. Where does all my money go? Empty Pockets in Englewood A: Dear Empty Pockets, I know exactly what you mean and so do thousands of other investors. This is the big white elephant in the room that everyone is trying to ignore. There is suppose to be money stacking up each month from positive cash flow, but by the end of the month it’s always gone. From what you’ve told me, there are two reasons you can’t find any money. First, your $100 -$200 monthly spread between your rents collected and your mortgage payments is not called positive cash flow. It’s called gross monthly margin. Many more dollars need to come out of that monthly spread to be saved up for later expenses. For example: 1/12th of the yearly property taxes and 1/12th of the yearly insurance. Also you must consider those expenses that only happen every few years, like turnovers. The biggest reoccurring expense a landlord will have is when their tenants move out. This brings me to the second thing you’ve told me that is making your money disappear. You’ve been renting your houses for a couple of years. I’ll bet that your average occupancy (how long the average tenant stays in one of your houses) is around the two year mark. My average tenant stays in one of my houses for just over three years and I’m always trying to keep them longer. Your average length of occupancy affects your cash flow math by changing the time frame you should be measuring. If your tenants stay for two years before you have to spend the majority of expense money, then your monthly measurement is wrong. It’s like using a ruler to measure how far a quarterback can throw a football. You need a football field to measure the throw. Here is an example from my business. My average tenant stays for three years. When they move I will have paid three $250 annual insurance bills for a total of $750 for the life of the tenant, three $450 annual property tax bills of$2,250, the cost to clean and repaint the house $1,000, the cost to clean or replace the carpet (most carpet cost $1,000 per house and will last two tenants) $500, “for rent” advertising of $350, and if the house has a mortgage payment one month out of my pocket $600. All totaled, through the length of my average occupancy (3 years or 36 months), I will have to pay $5,450 in expenses. $5,450 divided by 36 months is $152 per month. I have to save $152 of each month’s cash flow just to have enough money to pay all of the expenses for the average three year occupancy. In reality, this is not enough because we haven’t accounted for roof, furnace, central air, or water heater replacements. The moral of the story is if there is less than a $200 gross monthly spread, I’m losing money on that house. Your math will be slightly different depending on your specific expenses and average occupancy. For me, if I want to make $200 a month on a rental, I need to start with at least a $400 gross monthly spread. The only way to do this is to either buy cheaper or write bigger down payment checks. Jay Long is an expert real estate investor and national speaker. He’s also a licensed real estate broker, author of several real estate courses, seminars and a monthly newsletter, and former vice-president of KREIA (Kentuckiana Real Estate Investors Association). If you would like more information about Jay’s courses, monthly newsletter subscriptions, or if you would like to have Jay speak to you group… contact him at: JAY LONG PO BOX 20025 LOUISVILLE, KY 40250 PHONE (502-893-3313) FAX (502-893-3384) EMAIL Jaylong7@aol.com or www.JayLongInnerCircle.com
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