Cash Flow In Real Estate – The #1 Reason to Invest

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Cash Flow In Real Estate – The #1 Reason To Invest

What’s the #1 reason that attracts people to real estate investing? Passive income, right? This comes from the cash flow real estate spins off that allow some of the wealthiest people I know to be in the position that they’re in.

It’s also how so many high-income professionals have been able to reach financial independence (like the Physician on Fire) and even fatFIRE in 5-7 years.

Grant Cardone bases his entire TV show around the cash flow real estate he’s involved with to help other investors with investing in real estate.

His choice of hats says it all!

man-with-cash-flow-hat

If you’re scratching your head wondering if you should invest in something that you don’t much know about versus working until you’re 70+ then I encourage you to sit down with your spouse and create some realistic financial goals.

What does your life look like in 5,10,20 years?

Be as SPECIFIC as possible.

  • What does your home look like?
  • Where do you want to travel?
  • How much monthly cash flow do you want coming in?
  • Do you want to bring your kids or grand kids to Disney each year?
  • Do you want a house in the mountains or beach?
  • When do you want to cut back working or retire all together?
  • Do you want to retire to something that you love?

As you can see, there’s a lot of issues to address.

My wife and I recently had this conversation during one of our six mile walks. I’m glad we did because what she WANTS and what I WANT are much different. It’s part of being married.

She wins and I….well no comment on that one!

So it’s good to find this out so you can BOTH work together to help each other out.

No matter what you’re aspiring to achieve, more than likely you’re going to need some source of income to do it.

You have to decide if you want it to come from active vs passive income.

If you want to do this passively (like me) then cash flow is the key and the primary focus in building infinite wealth.

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You Have A Choice

If you’ve been reading this blog for a while, you know that I’m a big on working SMARTER instead of harder.

One of my teenagers is working landscaping and mowing yards with a friend of mine this summer. He wants the money to help his dad pay for a car 🙂 next year but he’s also getting a good taste of what working hard is all about.

I told him next year he could either:

a. continue with the manual labor and work for someone

b. start his own company taking his new-found skills with other people working for him

He’s now got a choice and so do you.

You can continue life as either an employee working for someone or self-employed working for yourself. But realize both of those situations require you to show up each day to work and if you don’t….no $$ comes in.

This is called a J-O-B and you fall on the left side (poor side) of Robert Kiyosaki’s (Rich Dad Poor Dad) CashFlow Quadrant.

If you’ve chosen to work smarter, then let’s find out how….

What Is The Definition Of Cash Flow?

Here’s a 4 minute video from Bigger Pockets explaining cash flow:

In order to calculate cash flow in real estate, you simply take how much income is leftover after all of the bills have been paid. It’s the money you can pocket at the end of the day.

In the past I dabbled with different types of real estate investing until I found one category, real estate syndications, that are helping us build streams of passive income each year.

These are now our MAIN focus.

Many Passive Investors Circle members have questions about real estate cash returns and specifically the cash flow real estate syndications pay out in distributions on a regular basis.

living_with_the_landI’ve decided to take you on a behind the scenes tour (not a Behind The Seeds Tour for my Disney friends 🙂 )

Let’s get going…


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Cash Flow Distributions

The majority of the investment property syndication deals that are offered pay regular cash flow distributions (monthly or quarterly), starting anywhere from 2-4 months after closing.

The best part about this is that they keep coming in no matter what the stock market is doing. This was especially helpful for us during the COVID-19 pandemic when the stock market started a steep decline.

Gross Potential Income

As stated earlier, income comes from cash flow real estate investments spin off. In our case, we’re going to stick with focusing on apartment syndication deals as they’re my favorite passive investment.

The main source of income for apartments are form the rent the tenants pay on a monthly basis. But there are other sources of income they receive such as:

  • laundry fees
  • covered parking
  • storage units on site

Let’s say that the 100 units of the apartment syndication you invested in rent for $800 each. That means that the gross potential income is $80,000 per month, or $960,000 per year.

Monthly Gross Potential Income

  • 100 units x $800 each = $80,000 per month

Annual Gross Potential Income

  • $80,000 per month x 12 months = $960,000 per year

Keep in mind that this is the gross POTENTIAL income. That means that’s the total income assuming all the units were filled, at market rents, with no concessions (e.g., “first month rent is free”).

Net Rental Income

The net rental income is when you factor in the:

  • vacancy costs
  • loss to lease
  • concessions

For our example, we’re going to factor in that 10% of the units are vacant. So with a total of 100 units, then 10 units are vacant.

Due to the fact that each unit rents for $800, the monthly vacancy cost is $8,000.

Monthly Vacancy Cost

  • 10 units x $800 each = $8,000 vacancy cost per month

Over the course of the year, assuming the vacancy rate stays the same, the annual vacancy cost would be $96,000.

Net Rental Income

  • $960,000 gross potential income – ($8,000 vacancy cost x 12 months) = $864,000 net rental income
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Operating Expenses

As with any business like my dental practice, an apartment building has expenses too.

These expenses include:

  • maintenance and repairs
  • property management fees
  • cleaning fees
  • landscaping
  • utilities
  • legal fees
  • insurance
  • pest control
  • payroll

For our example, we’re going to assume that the total projected monthly operating expenses come out to $38,000 or $456,000 per year, in operating expenses.

Annual Operating Expenses

  • $38,000 monthly operating expenses x 12 months = $456,000 annual operating expenses

Once you take out those expenses, you arrive at the net operating income, also known as the NOI.

Net Operating Income (NOI)

  • $864,000 net rental income – $456,000 operating expenses = $408,000 NOI

Hopefully you’re still with me. So for our example after expenses are taken out, we’re left with a NOI of $408,000.

Mortgage

No different than when you purchase a home, the sponsor in a syndication deal obtains a mortgage after paying a down payment.

As part of the monthly expenses, the lender would be paid back in the form of principal and interest payments.

Let’s say that our principal and interest is $20,000 per month. This would bring the annual mortgage payments to $240,000.

Annual Mortgage Payments

  • $20,000 monthly mortgage x 12 months = $240,000 annual mortgage payments

Cash Flow/Cash on Cash Returns

Now we can get to what we’ve all been waiting for…the cash flow real estate part (aka cash-on-cash returns).

First Year Total Cash Flow

Remember our NOI was $408,000. If we subtract out the mortgage of $240,000, we’re left with a positive cash flow of $168,000.

$408,000 NOI – $240,000 mortgage = $168,000 first year total cash flow

Depending on the agreed upon deal structure, this amount is then split up. Most deals have either a 70/30 or 80/20 deal structure.

In our example, we’re going to use the 80/20 deal structure. What this means is that:

80% of the profits go to the investors (which is YOU)

20% go to the sponsor team (i.e., the general partners)

First Year Cash Flow to Investors

In our example, the first year cash flow would be $134,400.

$168,000 first year cash flow x 80% = $134,400 first year cash flow to investors

Most syndication deals are for accredited investors only with a $50K minimum investment.

Depending on your investment amount, you’d get a share of that cash flow every month or quarter, in the form of a distribution check.

Actually, it’s not a physical check but a direct deposit. 🙂

Cash Flow Distribution Checks

In our example we’re going to assume that you receive distribution checks on a quarterly basis and that you initially invested $100,000.

Your quarterly cash flow distribution for the first year would be $2,157.

Over the course of that first year, you would have collected roughly $8,628 in passive income from this investment.

Are these guarantees? Of course not. Nothing is except taxes and death.

There are MANY factors that go into the actual calculations, and these any projections are just that. Projections.

That being said, such projections are a great way to evaluate your potential returns on your investments, and to see exactly where each dollar of your investment is going, and where each dollar of projected cash flow is coming from.

Tax-Free

Now that you’ve learned that the distributions come from the cashflow of the property. There are two notable benefits of this as investors:

a. Cash flow distributions = passive income to investors throughout the year

b. The depreciation of the asset is often higher than the cash distributed to investors = tax-free income from the distributions.

Final Thoughts

Hopefully you’re now starting to realize that cash flow can ultimately lead to financial freedom.

Something else that it can do is eliminate the fear of running out of money, especially during retirement.

Your goal should be to get more cash flow (passive income) coming in than you spend on living expenses.

By definition, that’s financial independence! You’re making your money work hard for you instead of you working hard for your money.

What are you waiting for? 

Join the Passive Investors Circle to start your journey today.

jeff@debtfreedr.com
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4 responses to “Cash Flow In Real Estate – The #1 Reason to Invest

Richard Ramos

I like the idea of passive income, but I will have to invest in at least 20 syndications to get to live off of the profits from the yearly income it is producing. Or are you saying that this should be part of our total portfolio for retirement?

jeff@debtfreedr.com

Richard, you can live all of the income that is produced, typically tax free and yes, it SHOULD be factored in for your retirement portfolio.

Dr. Jim Block

Hi Jeff,

Is it possible for you to be a little more specific on how you derived the income in this above example Real Estate Syndication. How many “investors” are drawing income from this investment example? These investors are sharing the 80% net? The General Partners are doing exactly what in terms of the financing of the project? Are they private equity investors? I am just not seeing the total picture;; however, am very interested in developing additional income streams. I own a professional condominium suite for dentistry and it’s paid off. Haven’t retired from Dentistry and really have no plans to at this time. I enjoy what I do, but realize the importance of more passive income than just my suite. I am heavily into the stock market and enjoy it very much, as well. In advance, thanks for your reply.

jeff@debtfreedr.com

Hi Jim,

Thanks for reaching out. I see that you have many questions and I’d encourage you to read some of the articles under the Real Estate Investing Tab regarding syndications.

Here’s a few to get you started:

https://www.debtfreedr.com/what-is-real-estate-syndication-deals-and-how-to-find-them/
https://www.debtfreedr.com/real-estate-syndication-structure/
https://www.debtfreedr.com/7-steps-to-investing-in-your-first-apartment-syndication/
https://www.debtfreedr.com/4-reasons-to-create-passive-income-with-multifamily-syndication/

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