InvestmentReal Estate Investing: Cash Flow

In a previous post we touched lightly on what was described as an “Equity play” i.e. an investment where the major return is an increase in the property value or “equity “. If this is the intent then these tend to be short to medium term investments. An alternative way of looking at property investment could be described as a “Cash flow” play, i.e. paying market value for a property with an expectation that the rental return is higher than the investment cost.

Let’s look at a couple of opportunities that have arisen recently in the downtown marketplace. The first was in the Eastside neighborhood of Charleston. This is the least developed area of the City south of the Crosstown and one where there are many investment and construction opportunities. It’s close enough to the main employment centers that you can walk or cycle all year round.

We looked at a converted industrial premises close to Meeting St. as a potential cash flow play. I’ll simplify the figures a bit for this illustration. About 10 units in total rented as single bedroom apartments. Rentals were quite good at about $900 per bedroom or $90,000 net per year after insurance and city costs. The property was for sale at about $1.1M and would be suitable for a commercial mortgage. Running the math on this, $200,000 down and $900,000 mortgage at 4.5% on 20 year amortization. That’s $5700 per month or just under $70,000 per year for the mortgage plus loan repayments. This still sounds ok, not great but ok. However, an inspection revealed issues with deferred maintenance. The roof would need replacing in 2-3 years, rooms were at best average and a lot had A/C window units. We guessed that perhaps $200,000 needed spending. That would increase the mortgage to $1.1M, $7000 per month and reduce the return to $6000 per year net. A well funded investor may look at this as a longer term play, banking on a general increase in property values to improve the Cap rate as the years roll on. There is a play to be had in this form. A less well funded investor, gearing from the bank, should avoid this opportunity as it is, at best, marginal. A max Cap rate of 8% was too low and we walked away from this opportunity.

The second opportunity was in Cannonborough. A large converted Charleston Single with additional house to the rear. 5 units in total, 3 two-bedroom, and 2 one-bedroom. Asking price $750,000. Using the same assumptions as in the first example with $200,000 down and $900 per bedroom, rental return is $72,000 per year net. Mortgage costs $42,000 per year. This property is producing a better return for less borrowing than the first example. Maintenance, whilst not great was not bad either. Some updating had been undertaken and the inspection report resulted in a further $10K of remedial maintenance from the seller. There is some room to improve rental returns with further upgrading of units as tenants change. Spreading the timeframe for this will keep the investment in the black. The Cap rate is 9.6%, a little less than our target of greater than >10% but pretty close. We took this property under contract to add to our own portfolio of downtown investment properties.

So, in summary:

• For a Cash flow play, try to make sure your cash flow remains positive. We look for a return >10% but can accept a little less in some circumstances.
• Deferred maintenance can kill an investment and is often found where an existing owner (often an investor himself) intends to divest and fails to keep up with the demands of wear and tear.

Note: Real estate opportunities in this city are endless and Charleston is one of the top places to invest in real estate. Our team of property and investment specialists include experts who have successfully executed cash flow plays and invested in real estate themselves. Let our team of realtors guide you through the process of investing in Charleston’s array of real estate options. Start your search for the right investment property now…