Cash (Flow) Is King

Written by Wade Graham | 18 October 2011

If there is anything I have learned as an investor in the past 5 Years is that Cash Flow is King.  Positive cash flow properties combined with variable rate mortgages helped us not only survive a recession but actually prosper in it.  While we were watching big name investors fall off left and right our conservatively budgeted income properties were humming right along and as interest rates dropped in the recession our margins got wider.

Was it all roses? No, certainly not!  Some of our rents needed to be lowered, tenants were harder to come by and vacancies tended to be longer than I was used to in the Alberta boom times.  But we were still doing just fine!  Mortgages were getting paid along with our investors which is more than some investors could say. Our focus on cash flow had served us very well while others who had focused on the number of doors they owned were suffering.   Cash flow investors looked like fools in the boom when we couldn’t find property.  Others, with greed in their eyes, seemed to be closing on properties everywhere and we couldn’t figure out how they were making it work.  Turns out neither did they!!

Markets go in cycles and it takes discipline to be a cash flow investor but when things get rough, like they always do, you will be glad you turned down that break-even property.

This all begs the question, where do I find cash flow investments in today’s market?  Let’s take a look across the country at the major centers and see which provide the best average price to rent ratios.  I have always said that averages are for average people so don’t think that you can’t buck the trend but this should give us an idea of where investors can look for that elusive income property.

Interesting numbers!  Obviously the higher the ratio number the more likely you will find cash-flow.

Now, I am not so naive to think that these ratios are the be all end all to investing as many other factors come into play such as but not limited to: Political environment, growth opportunities and local knowledge!

I have used average house price vs 2 bedroom rent which may not be a fair comparison for the reality of the investment land scape.  Many of our houses in Calgary fetch considerably more than $1,069!  Our rents are more in the $2,200-$2,600 range and we only spend about $340,000 which makes the above published ratios dismal!  As I said, averages are for average investors!

So how can you get more rent for your income property?

Well, one of the strategies that has worked wonders for us over the years and Scott Magilvery made a HGTV show out of is the super suite!  Adding a secondary suite to your rental can sometimes double the income!  Now be wary of this strategy.  Yes it amps up the income but, like everything, it has some downfalls.  Zoning is one!  If you have an illegal suite it can be shut down quickly nullifying your investment.  Also with more doors comes more tenants and sometimes more headaches.  Who is going to pay the utilities?  Again, super suites have served us well but beware of the land minds!

Furnished rentals can provide outstanding boosts to your income!  In boom times downtown furnished condos were fetching $4,000/month or more!  Again, look behind the curtain before you get into this strategy.  Corporate clients are great when the economy is booming but when the purse strings get pulled in…watch out!  Logistically you are basically running a hotel.  Who is cleaning it? Doing check outs? Marketing?

Are you renting your parking and storage locations?  I get between $200 and $300 per month for a garage in Calgary! Some guy needs to store a boat that his wife no longer wants to see in the back yard or a mechanic needs a place to work on that car he loves.  There are a million reasons people need storage!  Why don’t you help them out!?

Lastly, the hottest new strategy seems to be Rent-To-Own.  Boost your cash flow and you now have owners instead of tenants!  “Sounds great,” you say, “no more midnight moves and toilets!”  Well you guessed it, this is an advanced strategy with its own set of downside risks.  Make sure you are well versed in contract and tenant law and every few years you have to find a new property to sell to the market.   Talk to a few niche experts before you move on this strategy but it can be a real winner!

The creative investor can come up with a thousand ways to amplify income and if you are a savvy entrepreneur you will find a few I amsure!