Through real estate investing, I have found one of the best investment vehicles for generating monthly cash flows that can help fund my adventure travels. And, of course, I’ve found a great vehicle for wealth building.
In this article, I share details about my real estate investing strategy and why cash flows from real estate are the adventurer’s ticket to long term travel.
Our Current Real Estate Portfolio
I invest in single family homes, and I invest for cash flow, aiming to develop a substantial income stream that will allow me to continue my adventure travels for years to come.
To be clear, I don’t buy and flip houses. I buy houses, fix them, and hold them. I’m in it for the long haul, and I’m in it for the monthly cash flow.
Every month, I want my real estate investments to put money into my pocket, money that I can spend on adventure travel.
We currently own four, single family homes, three of which are dedicated rentals and one of which is our primary home, which we converted into rental while we travel.
I’m focusing the analysis that follows on the three rental properties because they are true rental real estate investments.
Our primary home wasn’t meant to be a rental, and it certainly doesn’t meet my standards for an investment property, as I barely break even when renting it. I address the financials of a primary home in a separate article, “Should you sell or rent your home while traveling long-term?”
The Cash Return from our Rental Properties
The three rental properties we own are all leveraged, meaning they carry mortgages. The mortgages range from 3.5 to 4.375 percent, and they are all 30 year fixed, conventional mortgages.
I prefer long term, fixed rate mortgages because that keeps the monthly mortgage payment low and consistent. I have the option to throw more money at principal if I want, but month to month I get to maximize the cash flow generated through rent.
We charge monthly rent to tenants through one year leases, and all of the properties provide provide positive cash flow. Each one covers the mortgage, taxes, and all related property management expenses, and on top of that still provide cash flow.
The properties combined provide a 12.6 percent Cash on Cash Return.
What is a Cash on Cash Return?
This number demonstrates the net cash returns (i.e. money pocketed) from the cash invested in a rental home.
Cash on Cash Return is calculated with the following formula:
Cash on Cash Return = Net Cash Flow / Cash Invested * 100%
Cash Invested typically includes downpayment, closing costs, and property improvement costs to make the home rentable.
Net Cash Flow is the cash pocketed each month, after paying the mortgage principal and interest, taxes, insurance, HOAs, vacancy costs, and any maintenance or property management costs. It includes every dollar invested in the property.
Since maintenance costs and vacancy costs fluctuate, I use conservative placeholders for each of these items when calculating the cash return.
I estimate 5% of monthly rent to cover monthly maintenance costs, and I estimate 5% of monthly rent for vacancy. By doing so, I am setting aside 10% of monthly rent each month to cover maintenance costs and the vacancy that may occur when changing tenants. Though this 10% goes into my pocket each month, it is earmarked for property expenses and therefore deducted when calculating my Net Cash Flow.
Here’s an example to show how we calculate the Cash on Cash Return on a $125,000 townhouse carrying a 4.25%, 30 year fixed rate mortgage, renting at $925 per month.
First, a look at the overall numbers related to purchase price and cash invested.
|Current Property Value||$127,500|
|Downpayment (20%) + Closing Costs and Fees||$26,250|
|Property Upgrades / Major Renos before renting||$2,000|
|Equity (current property value – loan balance)||$44,972|
And then, a look at the income and expenses generated by the property.
|Gross Income from Rent||$925.00||$11,100.00|
|Principal and Interest monthly||-$422.45||-$5,069.40|
|Taxes and Insurance monthly (escrow)||-$87.16||-$1,045.92|
|HOA monthly dues||-$50.00||-$600.00|
|Maintenance (5% of rent)||-$46.25||-$555.00|
|Vacancy (5% of rent)||-$46.25||-$555.00|
|Net Income before Taxes (Net Cash Flow)||$272.89||$3,274.68|
|Cash on Cash Return = Net Cash Flow / Cash Invested||11.6%|
Basically, through the Cash on Cash return, I want to understand if I am getting a good return on the money that I have invested into real estate.
In the example above, I would be happy with the 11.6 percent return. In practice, I aim to buy more expensive homes that rent for higher rates so that I can generate a greater amount of cash flow. However, I certainly wouldn’t mind the scenario that provides a solid cash on cash return that puts $272 in my pocket every month.
If the cash return were lower, like less than 8 percent, I would most likely not buy the property. If the return on an existing property drifted downward past 8 percent as a result of depressed rental prices, I would probably consider selling it. I would invest my money in a different real estate investment or perhaps move my money to a different investment where I could get equal or better returns, without the landlord headaches, such as stocks.
The Importance of Cash Flow to Adventurers
As an adventurer, Cash on Cash Return is one of the top factors I consider when purchasing an investment property, though many real estate investors would probably suggest there are numerous other numbers to evaluate, like CAP rate.
For me, I don’t make complex real estate investing decisions. I try to keep my investing strategy and decisions simple.
I invest in real estate to generate cash flow because this stream of cash funds my adventure travel needs.
The Cash on Cash Return helps me ensure I am getting the best return possible on my cash, which means I am putting as much cash as possible in my pocket each month to spend on travel.
Cash on Cash Return Doesn’t Show the Whole Investment Picture
Cash on Cash Return does not take into account a number of benefits of real estate investing, which is why most investors include a number of different factors when evaluating investments.
For one, Cash on Cash Return does not take into account the equity paid by the tenants each month.
When you’re tenants pay you rent, they are in turn paying your mortgage. Each mortgage payment includes both principal and interest. The money paid towards the principal balance increases your equity in the home.
This is great upside for rental real estate investing, as that equity belongs to you.
In addition to the monthly payment towards principal, hopefully your property values are increasing, also contributing to an increase in equity.
Through both of these factors, your overall net worth increases because you increase your equity. As you can see in the example above, the home owner has built up $44,972 in equity through both an appreciating property and the principal paid by tenants over the years.
While this wealth building is awesome, as an adventurer, I don’t care a whole lot about this in the short term. I can’t spend equity. Equity doesn’t put gas in the RV, pay for backcountry permits, or buy a new surfboard. So I don’t pay much attention to it.
I could get access to equity through refinancing or through a Home Equity Line of Credit (HELOC), but I’m not going to that because I do have a longer term strategy for that growing equity.
The other primary advantage of real estate investing are the tax advantages, which Cash on Cash return doesn’t take into account. Through depreciation, rental real estate reduces your overall annual tax burden, and you can also deduct expenses related to property management.
I don’t fully understand the tax implications of rental real estate. I so despise taxes and the complexity of taxes that I just don’t care to learn much about them. As a result of my willful ignorance, I don’t assess the tax benefits when purchasing an investment property. The tax deductions are all upside for me.
Again, cash is king, and what I need, as an adventurer and traveler, is cash flow. I care about Cash on Cash return.
I need money flowing into my bank account each month. If a rental property cannot generate healthy cash flows, then I’m simply not interested.
What about property management?
I have well built and well managed properties, this cash flow arrives with very little hassle.
I can be transiting the Panama Canal in a sailboat or padding the Danube in a kayak, and the money arrives in my bank account, ready to buy me and my family pizza and ice cream in the next town.
I do not use a traditional property manager, and I will share my strategy for property management in another article.
Cash Flows for Adventurers
I hope you can see the advantages that the cash flows from real estate investments when it comes to funding your adventure travels. I earn a good amount of money each month from my real estate investments, and that cash goes a long way towards helping me realize my biggest and baddest adventures, not to mention building some legit wealth.
However, I know that real estate investing isn’t easy and it also takes some time and cash to get going.
This article clearly doesn’t give you everything you need to know, but if it sparks a fire inside you such that you think real estate is your ticket to adventure, then I encourage you wholeheartedly to read and research real estate investing.
Start to build your portfolio. I started with a single, dinky townhouse, and I’ve grown to three. I fully intend to acquire dozens over the years, and you can view my long term real estate investment approach in a future article.
If you’ve got any questions about real estate investing, feel free to ask in the comments below.
I may not be able to help, but at least I can point you in the right direction.