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Table of Contents The Real Estate Investor¿s Guide to Cash Flow and Equity Management By Jack Cummings DEDICATION INTRODUCTION CHAPTER ONE WHAT IS CASH FLOW AND WHERE DOES IT COME FROM Goal of this Chapter: To Introduce you to the Mechanics of Cash Flow TERMS AND CONCEPTS YOU NEED TO KNOW: Cash Flow Cash Flow after Taxes Depreciation and its Effect on Cash Flow Contract Rate vs. Constant Rate Leverage: Positive and Negative CAP Rate WYSINAWYN Minor Factors Govern the Potential Return of All Real Estate Zoning Ordinances Building Rules and Regulations Economic conversion Hidden Limitations to Use Getting to the Cash Sources of Cash Flow Existing Rent New rental opportunities Increased rent Potential Reduce Operating Expenses Cost of living and other increases Restructured debt Reduce or remove unproductive expenses Barter for some needed maintenance Cut out some maintenance expenses completely Offer pay-as-they-play amenities Collect on tenant violations Increased Rent Potential Better Management Reduce Fixed Charges Reduce Operating Expenses Cost Of Living And Other Increases Examples of Common ¿Pass Through¿ Items for CAM Charges Restructured debt Reduce Or Remove Unproductive Expenses Barter For Some Needed Maintenance Cut Out Some Maintenance Expenses Completely Offer Pay-As-They-Play Amenities Collect On Tenant Violations Real Estate Investment Examples Applied to Cash Flow Situations Investment property number one ¿ A 4 Unit Apartment Complex Investment property number two ¿ A Commercial Building CHAPTER TWO WHAT IS EQUITY BUILDUP AND WHERE DOES IT COME FROM Goal of this Chapter: To Introduce you to the Benefits of Equity Buildup Terms and Concepts You Need to Know The Three Most Important Words of Real Estate (are not Location, Location, Location) Double Dip to Big Returns The Seven Elements of Value in Real Estate The Seven Elements of Value in Real Estate Is the foundation of all wealth Is expected to go up in value Is necessary Full of perks Builds a nest-egg for retirement Pays for the increases in the cost of living Instant value by design TWO STEPS TO INSTANT EQUITY ENHANCEMENT Re-zone the Property to a Higher Economic Use Obtain a Site Plan Approval HOW TO BUILD A RETIREMENT NEST-EGG THE DOUBLE DIP WAY THE SEVEN SOURCES OF EQUITY BUILDUP Market appreciation The cost of living Reduced Debt Service Increased cash flow Economic conversion potential New income sources Better management CHAPTER THREE HOW TO FIND PROPERTIES WITH GREAT CASH FLOW AND/OR EQUITY BUILDUP POTENTIAL Goal of this Chapter: To Show Tips and Traps of Finding Properties that Maximize Your Goals Getting Ready to Invest in Real Estate Terms and Concepts You Need to Know Lenders Preferences Comfort Zone Investing Local Zoning and Politics HOW TO DECIDE WHAT YOU WANT TO BUY Rental Apartments Commercial Rentals Condo-Hotels Conversions Hotels and Motels Industrial Buildings Shopping Centers & Office buildings Single Family Homes Tenant-in-Common Investments Timeshares Vacant Land WHAT CAN GET INVESTORS INTO TROUBLE The Green Grass Syndrome Blind as a Bat The Big G Word Over the Leverage Cliff The Mouth Trap Fear Itself Now Build a Comfort Zone Investment Strategy Key Factors You Need to Look For In Your Comfort Zone The Nine Key Elements that Control the Value of Your Comfort Zone Road works and changes Infrastructure changes Building rules and regulations change Zoning ordinance changes Future real estate developments in the works Utility changes being planned Potential increases or decreases of local employment Local Government¿s attitude toward development Natural barriers that funnel growth pattern Where You Find Your Comfort Zone Data Agendas of City Meetings Building Departments City Commission Meetings County Commission Meetings Departments of Transportation DRC Meetings Economic Development Boards Fire Department Local news media Local Utility Companies Major Employers in the Area Planning Departments Planning Meetings School Boards Tax Assessor¿s Office Zoning Departments CHAPTER FOUR HOW FINANCING AFFECTS CASH FLOW AND EQUITY BUILDUP Goal of this Chapter: To Open Your Eyes to the Effects of Debt Terms and Concepts You Need to Know Presumed Value Value Added Delayed Payments Hard Costs and Soft Costs Construction Draws Cost to Carry the Debt Interest Only, Delayed Interest, Fixed Interest and Variable Interest Amortized Principal, Fixed Principal and Variable Principal Options Institutional Lenders Seller Held Mortgages Exchanges ¿ 1031 and Otherwise Sweat Equity An Example of Creative Financing and its Effect to Cash Flow and/or Equity Buildup. Harry¿s Option Deal Harry Chooses to Maximize Cash Flow Return But What if Harry Chooses to Maximize Equity Build Up Harry¿s Condominium Conversion Approach CHAPTER FIVE INSIDER INVESTMENT STRATEGIES THAT INCREASE CASH FLOW Goal of this Chapter: To Demonstrate Insider Techniques to Increasing Cash Flow Terms and Concepts You Need to Know The 4 Postures of Property Management Properties with the Best Potential to Increase the Cash Flow Poorly Managed Properties Current Rents Are Below Market Rates Simple and Cheap Improvements Warrant Rent Increases New and Positive Infrastructure Is On the Way Properties with Economic Conversion Potential 10 Comfort Zone Bonanzas That Point Toward Increased Cash Flow Additional Density Available Estate and Court Ordered Sales For Sale by Owner Hidden Gems Hot Neighborhood Lender¿s REO Out of Town Owners Overgrown Yard Victim of a Calamity Alexander¿s Example of a Mixed Technique Purchase To Maximize Investments the Increase of Cash Flow Sweat Equity Lease With an Option to Buy Interest Only Mortgage Sliding Mortgage 1031 Tax Free Exchange Economic Conversion How the Deal Finally Closes CHAPTER SIX PROVEN INVESTMENT STRATEGIES THAT INCREASE EQUITY BUILDUP Goal of this Chapter: To Give You Insider Information to Enable You to Find Properties that Allow You to Quickly Build Equity Terms and Concepts you Need to Know The Four Magic Factors of Equity Growth A Cooked Development Dramatic Change in Zoning and/or Development Criteria for Approval Tax Law Changes Sudden Realization that Developable Sites are Disappearing Where Do You Look for the Best Equity Increase Potential The Key Places and Events Where Equity Growth Is A Sure Thing Areas with Positive Impact due to the Magic 4 Factors of Equity Growth. Where there are Under Producing Properties You can Turn Around. When New Infrastructure with Positive Impact Potential is on the Way. Where there is High Employment of Middle to High Income Jobs. When there is a Potential to Sell off Under-Producing Elements that Results in a Bargain. When Properties have Economic Conversion Potential. Where Growth is Confined and Limited by Natural or other Barriers CHAPTER SEVEN TIPS ON HOW TO BALANCE CASH FLOW AND EQUITY BUILDUP TO BEST FULFILL YOUR INVESTMENT GOALS Goal of this Chapter: Discover How to Blend Cash Flow and Equity Buildup TERMS AND CONCEPTS YOU NEED TO KNOW The Unique Character of Real Estate Community Active 7 TIPS ON BALANCING CASH FLOW AND EQUITY BUILDUP Comfort Zone Management Good Accounting Advice Good Legal Advice Home-team Goals Plan Property Improvements Refine Leases Time Tables Ella¿s Balancing Act between Equity Buildup and Cash Flow Ella¿s Do It Yourself Center Proforma 8 TRAPS YOU NEED TO AVOID Urban Renewal Greener Grass Strikes at Home Bad Tenant Mix Overly Friendly Leases Cutting Down on Maintenance Under Insured Default Management Code Violations Start Opening Doors Today Dedication This book is dedicated to my mother who married as a child and when her two children were teenagers went into the real estate business. When I joined the family brokerage business, we were a grand group of Cummings¿ with my father, mother, sister, grandmother, and uncle mixed in with another group of unlikely suspects to be active in the real estate game. How we all got along, and were successful at the same time, is a tribute to my Mother, Virginia Jones Cummings. Introduction to The Real Estate Investor¿s Guide to Cash Flow and Equity Management Choose the Investing Strategy with the Maximum Benefits Real estate consultant and author, Jack Cummings, is focused on the nitty-gritty of one of the most important of all real estate investment decisions. Which is most important, Cash Flow or Equity Buildup? In his latest book, THE REAL ESTATE INVESTOR¿S GUIDE TO CASH FLOW AND EQUITY MANAGEMENT, he tackles the pros and cons of each of these two benefits. Although they are sometimes in conflict with each other, he shows you the primary and hidden source of each, how to identify which you need most, and how to maximize your ultimate benefit to achieve your goals. In his easy to read style, Mr. Cummings shows you the magic of cash flow, as well as the long-term benefits of equity buildup. This book is filled with dozens of true ¿insider techniques¿ so that by the time you have completed this book you will have the confidence to set your own goals to maximize your return from your real estate holdings. Mr. Cummings has over 35 years of experience as an investor, developer and Realtor. His chapters are filled with concise easy to follow examples of tips as well as investment traps that await you in the real world of real estate investing. He begins by describing exactly how you can increase both cash flow and equity buildup, and then he proceeds to carefully illustrate how you can find properties that will offer the best potential for each. Each chapter is presented in what Mr. Cummings calls his building block method. The goal for each chapter is presented, then special terms and concepts that are especially relative to that chapter are discussed. Then the real ¿insider stuff¿ is unveiled as he shows you how to increase the bottom line and to maximize your goals. He describes and then illustrates his points with concise examples from his own investment career and experience. He begins with the Magic of Cash Flow and ends showing you how to blend cash flow and equity buildup to best suite your age, experience and investment needs. Each investor, Mr. Cummings stresses, has a different need to be satisfied. Whether it is to maximize cash flow, or to quickly buildup equity, Cummings shows you the path to those goals, and how they differ for each investor. His goal is to give you the tools you need to ascertain which of these two elements is to be maximized, how to get the maximum benefit and when, if ever, you should switch to the other. Chapter two opens a new world for investors who believe the three most important words in real estate are ¿location, location, location¿. Cummings quickly dispels this myth with clear evidence the old trilogy is outdated. He says ¿location¿ is just one of the three most important words. To discover the other two is worth the cost of the book. Cummings borrows insider concepts from his many other real estate investing books, selecting those critical to cash flow and equity buildup and then adds new concepts that fit modern real estate strategies. He illustrates the mystic math of equity buildup and shows the miracle of using ¿Other People¿s Money¿ to double dip your way to wealth in real estate, no matter if you prioritize cash flow or equity buildup¿ as long as you follow his examples and experience. Do you want to have the safeguard that if the value of your investment drops to half of what you paid for it you can still profit? Why not, Cummings has shown investors the secret of how you can do this with every income producing property you ever buy. He has done it himself, and he shows you how easy it is. In fact, after you see how it works, you are likely to hit yourself on your forehead and say ¿why didn¿t I see that myself¿. You will profit from this concept. No matter if you are just getting started in real estate, are getting ready to retire or have already retired, you will discover how best to achieve your personal objectives through simple, positive oriented interim goals with the property you will buy, or that you presently own. Investment strategies are changing, and many concepts that were valid ten to forty- years ago are no longer safe. Too many people follow real estate news that is spread by Wall Street, or your evening television news and believe what they hear and see. Cummings spells this out in big bold letters that real estate is local, not national. What goes on in your hometown is not following the same trends at the same time as in other areas of the country, your state, or even in the town ten miles down the road. This book is an easy and fast read. It will deliver to you the most bang for your buck you¿ll get today. In fact, it could well be one of the most important books you will ever buy that can get help you avoid mistakes, or to move back to the right path for maximum profits. You will know if you should you maximize cash flow, or set up an investment strategy that will allow you to quickly build equity? This book has the answer.
Library of Congress Subject Headings for this publication:
Real estate investment.