Cash Flow: Most Important
The number one benefit of commercial multifamily assets is cash flow.
Cash flow provides ongoing income. For our investors, this is a regular stream of passive income. We work hard managing our properties so they produce this income, month after month, year after year. The major factor in the bank’s underwriting and approval of financing on our properties is this flow of money. Cash flow provides stability and increased safety to this investment.
Because our well-developed plan for our properties builds in ongoing cash flow, even when circumstances work against us, we can keep on operating in good times and tough times.
Cash flow is a real strength of multifamily properties as compared with other assets. It is relatively predictable as compared with that of other assets, even single-family houses. In addition to rents, properties produce income from laundry facilities, utility reimbursements, valet trash pickup, and other services. Subtract from these regular income streams the ongoing expenses of managing the property and we have Net Operating Income. Then subtract loan payments and we have cash flow available for investors.
We analyze the numbers very carefully before we purchase a property, to make sure it will produce monthly cash flow even if circumstances turn against us. We are very conservative when we purchase an asset. We ensure a significant difference between current cash flow and a break-even point, where cash flow would stop being positive. We plan to not be in a position to have negative cash flow. And we manage to not only preserve cash flow, but to consistently increase it.
Net Operating Income (NOI)
The value of the property in multifamily assets is directly related to the Net Operating Income. Increase the Net Operating Income, by increasing revenues or decreasing expenses, and the value of the property goes up. The opposite is also true. Cash flow is important.
We might be projecting good appreciation. We might be computing pay down of principal over time. We might be building in the positive effect of delaying paying taxes through depreciation and other tools. But, the month to month operations must still produce positive cash flow.
Real estate is a good hedge against inflation, like gold, but real estate produces cash flow, while gold does not.
Regular Return on Investment (ROI) for Investors
Positive cash flow allows us to offer regular quarterly returns to our investors, if they desire them. Sometimes during the early value-add phase, we put cashflow back into the property for strategic reasons.
For us and our investors, investing in Commercial Multifamily Assets is a long-term investment plan.
This is not a “get rich quick” approach. Although growth in the value of our properties can occur in fast-growing markets or when purchased and managed well, we are planning for the asset to grow over long periods of time, two to five years or longer.
We are in this business with a deliberate, long-term wealth building objective for ourselves and our investors. We want better returns, better than many other asset classes over the long term.