The Keys to Cash Flow Investment Analysis

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Keys to Cash Flow Analysis

Making Smart Decisions with Proper Due Diligence on Investment Properties

Instructor – Leonard Baron, MBA• Long Term Real Estate Investor• Owns and Manages Many Properties• Long Term Real Estate Consultant• Past Real Estate Lecturer at San Diego State University• Teaches or Guest Lectures at SDAR, SDCLL, USD,

UCSD, The Career Compass, Qualcomm, etc.• MBA at USC, Undergraduate from James Madison University

Learned Many a Hard and Expensive Lesson and Hopes to Help You Learn those Hard Lessons Without Having the Financial Pain He’s Experienced!

ProfessorBaron.com DueDilligenceInstitute.org

Polling Question

Time for A Polling Question!

When investing in real estate, should you target the properties with the best location, location,

locations, in your area?

Categories in Due Diligence Process

What We’ll Learn in the Course Today

Projecting a Targeted Property’s Cash Flow is One of the Important Steps in Making Smart Real Estate Investing Decisions!

3. INVESTOR RENTAL CASH FLOWS

REMEMBER: All of the Applicable Due Diligence Steps Are Vitally Important to Helping You Make Better Decisions!

Investment Real Estate

Investment Returns Come From Either….

1. Appreciation in Value - Doesn’t Pay Bills and Cannot be Counted Upon; or

2. Positive Flow – Does Pay the Bills!

To-Do: Pencil Out – “Pro-forma” Your Deal Cash Flows with Conservative Estimates to Calculate a “Cash On Cash” (COC) Return.

Once You Know Your COC Returns, Is It a Good Deal?

Polling Question

Time for A Polling Question!

What are the long term rates of return on real estate investments?

• 10%• 0%

• Negative %• It Depends

Investment Rental Real Estate

Let’s Look at What Other Assets Produce Before We Learn How to Calculate Real Estate Investment Returns.

If You Invested Your Hard Earned Cash Into:

Are you Making a Smart Financial Decision?

Taking Money Out of Your Financial Assets…

[CDs, Bonds, Stocks = Low to High Risk but Liquid]

Presumably Earn Interest, Dividends and/or Appreciation in Value and Hopefully Increases Your Wealth Over Time

Is Placing That Money Into Real Estate…

[Real Estate = High to Extremely High Risk and Liquid]

Going to Earn You More Wealth at a Similar Risk Level for a Similar Time Horizon?

Let’s Proforma a Deal: Fair, Moderately Priced Property – Project Investment Returns

$40,000

6.15%

Equity Cash to Close – Is Far More

Important Than the Price

That’s What Really Counts!

“In the Black!” Conservative Cash on Cash Returns!

Moderately Priced Property

Prize Property! Investment Rental Real Estate

$150,000

-8.12%

“In the Red!”

Fancy Prize Downtown

Condo

Rental Properties – Asset or Liability? “It Will Cash Flow and be a Good Deal Because I’ll Pay All CASH….” Not True!

The Right Question: What is the COC %?

3 Vital Items in Projecting Returns:1. Cash Down payment2. Cash Flows/Income -

% Returns3. Risk – Are the

Numbers Good?

$150,000$40,000

6.15% -8.12%

Your Instructor Learned About Fancy Prize

Properties the Hard Way!

Key Takeaway: Not All Real Estate is Equal

“Where Do You Want to Invest Your Hard Earned Cash?

Prize Properties Are No Prize! Target The Location – of the Moderately Priced Boring Properties

Fair Deals Cash on Cash: (Excluding Prizes!)

Single Family 2% - 5%

Town Homes 3% – 6%

Condos/Apart 4% – 8% • 10%++ - Sounds TGTB True!

But It All Depends On What You Decide to

Acquire!

$150,000

Nominal Yearly Cash Flows

Cumulative 10 Year Cash Flows + 5% OCC

$113,612

Difference = $245,579

($131,961)

3 Town Homes1 Condo

3 Town Homes

1 Condo

So How Long Until the Prize Turns Positive?

Year 10!

($117,593)10 Year Cumulative Negative =

Note: Lots of Assumptions Herein

Fancy Downtown

Condo

So How Long Until the Prize Turns Positive?

Negative Cash Flows at Bottom – Includes 5% Opportunity Cost of Capital

Year 22!

But Still Cumulative Negative Below!

Nominally Positive Finally!

($269,566)

$337

Mortgage Paid Off !!!!!

But Still Negative!

Year 34!

($303,337)

Will You Still Be Alive to Celebrate This Day?

Your First True Positive Cash Flows!!!!!

Year 44!

$ 3,273!

Key To Remember…

Penciling Out Your Deal is a MustSome Properties Take Decades to Turn PositiveThat is No Way to Invest!

If You Don’t Learn This…You’ll Figure that Out Around the Time You Retire

Proforma Wrap-Up – How Do You Determine

How Do You Determine…RentsCraigslist.org, Call on Signs, MLS, Real Estate Professionals

VacancyTough to Do – Apartment Building Surveys, Drive Area, Call Listings

Maintenance and Repairs ExpensesEstimate 1% Per YearSFRs More Than Condos (HOA Fees Cover Some Condo Costs)

Polling Question

Time for A Polling Question!

Now you know how to pencil out a real estate deal, approximately what percentage of real estate investors know how to do this calculation?

90%75%50%<20%

Proforma Wrap-Up – How Do You Determine

How Do You Determine…

Budgtets, Property Taxes + CFDs (Mello Roos) and Add-ons – Property MLS Listing and County Website

InsuranceCall an Agent: SFR, Condo/HOA-6, Home or Landlord, Earthquake, Flood

Mortgage & PMITalk to Lender

You Can Download This Foolproof Spreadsheet – ProfessorBaron.com – Chapter 3 – Rental Property Cash Flows

The Next Three Slides Just Show My Simple Spreadsheet That You Can Download and Use On Your Own

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Textbook Page 32

Moderately Priced Property

Prize Property

Will the Below Knowledge Save You some Money in Life? You Invested $150,000 for That Negative CF?

Wrap Up and Recommendations

1. Pencil Out Your Deal With Conservative Numbers2. Pass On Negative Cash Flow Deals3. Prize Properties are NO Prize!4. Buy Properties You Plan to Keep for a Lifetime5. Do Your Due Diligence, It Is Time Consuming, But Less

Time Consuming Than Unwinding a Bad Real Estate Deal!

Due Diligence Guides at:

ProfessorBaron.com DueDiligenceInstitute.Org