Why Long-Term Cash flow > Short-Term Gains
I thought I’d share some details about some of the financials around a BRRRR project of mine. A lot of flipper’s may have been burned in the recent downturn, and that’s a reason why I never flip properties. I’ve seen too many times people get caught in the trap of a downcycle, only to lose all their profits. Long-term multifamily holds reduce that risk – but can also even provide that same “flipping” return.
Focusing on long-term returns but getting the same or close to the immediate gratification of the property “flip” is what this case study will discuss. The valuation and total process is more involved and variable by project, but you can find some of those tips on my blog. In the meantime, I’ll break down the investment target, financials, and results.
Property Details
Property Type: Detached
# of Units: 4
Purchase Price: $250,000
Condition: Uninhabitable
Yep, this place came straight out of a horror movie. It was not livable – no working toilets, kitchen, and windows all smashed. No bank would lend on this property, and B-lenders gave a resounding “nope”. I wasn’t about to use my own money to finance this property completely, and again, the devil is in the details. I will save financing details for another blog post. In the end, I secured private financing to move the project forward.
However, before moving forward, I’m sure anyone reading would be curious about what uninhabitable means to me. Take a look for yourself:
I think most people (including myself) would want to run in fear from a place like this. But as the famous Warren Buffet once said “be greedy when others are fearful”. This isn’t your typical buy/reno/sell. My focus for Hamilton properties is long term cash flow, long term equity build and exiting my initial investment costs.
Cash flow properties are less speculative because it requires the investor to build out the financials of the property based on today’s economics – not what it “might be worth” in a year. It becomes speculative when you assume you can predict market values (ie. when the market seemed to keep going up). Investing in cash flow requires knowledge of costs, expenses, attainable rents, appraisal values, and a lot more. However what makes it incredibly attractive is a lower risk profile, repeatable, and a great way to build wealth and equity.
So on to the details!
Costs of Project
Total Renovation Costs: $81,000
Total Monthly Carrying Costs: $8,100
Total Intial Equity (closing costs, lawyer fees, LTT, etc): $63,000
So how much money would I need to flip this property for to break even? Approximately $152,000! That would mean after my renovations, I would need to sell this place for about $400,000. Definitely doable, in fact easily attainable. I could probably get $500,000 – $550,000. That’s a profit of $150,000 right away! But then you have to pay capital gains tax, and that eats away about $35,000.
Flipping Profit: $115,000
But wait…. you need to stage the property to sell: $3,000
You need to pay real estate fees: $8,000
You need to pay lawyer fees: $2,000
Leftover Profit: $100,000
So approximately $100,000 is left over after all is said and done. Great money, lots of hard work and effort. But what if I say you can get a better outcome? What if you could get $100,000 profit (after all your expenses), generate $900 NET cash per month, and still keep the property?
That’s the beauty of focusing on rental investment properties, by identifying the ones that are the “home runs”. Because you need to be meticulous about the financials of a rental property, it’s possible to create a financial model to find the properties that can provide more than the profit from just a flip.
So using this rental property valuation approach, what were my results? First here are some “after” renovation photos. Note these aren’t professional photos, just some quick snaps for appraisal purposes.
The banks came in and actually gave me a cheque for $240,000 and wanted to take on this mortgage. I had any bank to choose from at this point.
So let’s recap:
Final Financial Results:
Total Costs (renovation + downpayment + carrying costs): $152,000
Banks Appraisal: $550,000
Bank Payout: $240,000
Net Gain: $88,000 – Tax-free which is the beauty of refinancing – the cap gains tax is deferred until you sell. So the question is..why ever sell?
Well, what about the mortgage? Now I’m paying a higher mortgage, can the rents be sustainable?
Rental Numbers:
4 Units Total Rent: $3600
Mortgage: $1,885 at new appraisal value of $550,000
Net Rent: $1,715 per month
So I got almost as much as someone who would have flipped the property for a sale ($88,000), making approximately $20,580 a year on rental income, and in 25 years this property will be paid off (+ $550,000). Additionally, there is a strong chance of capital appreciation over 25 years!
How much money do I have left in this property? $0 – Key Principle from the life-changing book “Rich Dad Poor Dad” is to pay yourself first.
Approximate value in 25 years of this investment? $88,000 + (25 years x $20,580) + $550,000 + Capital
Future Cash Value = $1,152,500 + Any Future Capital Appreciation + Future Inflation on Rents
Replicate this a couple more times and you can begin to build your bridge to financial freedom.
This process is repeatable, sustainable, and profitable by utilizing specific financial valuation around each project.
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