Saturday, August 02, 2014

This week’s question and answer:

Angela Herder: How to invest for Cash Flow in Aruba?

Miriam Engeln Investing for Cash Flow;

There are a lot of reasons why one wants to increase his/ her cash flow, and most of it has to do with financial flexibility. The more cash you have coming in, the more options you have, in terms of lifestyle, in case of emergency, and to build up towards future investments and/or business opportunities.

Real estate investing is not risk free, but the current market offers many opportunities. Rental prices have gone up steadily in many locations, mainly because many people either can’t afford to buy a home, or can’t qualify for a mortgage.

If you wish to own an investment property; it takes work, but it can be a great way to build wealth. I know of many people owning rental properties to either partially or fully fund their retirement.

For the following example, I'll use a fourplex (a building that contains four separate apartments), with all four units being destined for full-time rental. This is a simple cash flow calculation to illustrate the potential of real estate as an investment. Critical to this, as with most investments, is an intelligent and well-researched purchase on the front end, and I will inform you about that concerning your investment in Aruba. Here are the purchase and rental particulars:

1. Purchase price of the fourplex is $325,000.
2. Buyer pays 20% down ($65,000), financing $260,000.
3. 30 year loan is at 6.5%, with Principle/Interest payment of $1643 per month.
4. Taxes and insurance at purchase are $3600/year, for total payment of $1943 per month.

The buyer did their research and sees a steady rental demand for these units, all of which stay occupied most of the time. However a 6% vacancy and non-payment risk will be calculated to anticipate real cash flow. The units are all identical and rent for $900 per month each. Let's see how the calculation breaks down:

1. Gross rental income is $900 X 4 X 12 months, or $43,200 per year.
2. Payments are $1943 X 12 = $23,316 per year.
3. Previous owner's repair expense has averaged $1700 per year.
4. Vacancy and credit loss is estimated at 6% of rents or $2592 per year.
5. Owner spends about $400 each year in miscellaneous and advertising costs, and manages the property on their own.

Those are the basic operational items that go into our cash flow calculation. Let's take our calculation to the profits:
Rent income - Vacancy Loss - Payments - Expenses = Cash Flow
$43,200 - $2592 - $23,316 - $2100 = $15,192 / 12 = $1266 per month in positive cash flow.

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