rental properties are supposed to produce consistent monthly cash flow but then you actually buy a bunch of rental properties and you realize the reality is there are months where you have negative cash flow and then you have a lot of ups and downs like a roller coaster if this has happened to you you might wonder am I doing something wrong everyone else seems to be making a lot of cash flow with rental properties and you might start wondering if rentals are even a good strategy and if you'll ever get out of the financial rat race
after 21 years of investing in real estate this has definitely happened to me especially in the early years so in this video I want to give you some hope first I want to explain why this cash flow roller coaster is normal and why it happens then I want to give you Solutions both right now and over the long run so you start having a lot of cash flow every single month so you can free up your time to do whatever you want if that sounds interesting stick with me cuz I'm jumping into it right [Music]
now welcome to the podcast real estate investing with Coach Carson I'm your host Chad Carson you can also call me coach Carson and this is a show to help you get out of the financial grind so you can spend your time doing more of what matters so I want to start by drawing it out because visualizing always helps me and as I said earlier remember you're not alone in this this happens to everyone and it's more a function of how rental properties work so as you can see in this graph on the one hand we
have time so over time this is like month to month or year to year with your rental properties as you go to the right and then on the top axis is money so if you collect rent that's the blue line line here at the top you collect rent and every once in a while maybe once a year once every two or three years you're going to miss some of your rent so you're not going to collect the rent even if the rent is500 bucks or 2,000 bucks maybe you have a vacancy that's the kind of
normal thing that even in a good scenario you're vacant for a month and so you all of a sudden have zero money your income line here goes all the way to zero you have no money that for month or two so that happens consistently and it's just part of the business it's called vacancy and there something we have to build in when you're running the numbers on a rental property you have to do that so that's the one hand the income is not always consistent it's pretty consistent every two two three years and this is
also a reason I love single family houses and small Residential Properties because if you can get someone who stays for five years 10 years you don't have these big gaps that's another story that's another part of why I like to invest in certain types of small rental properties small and mighty style but another thing is in addition to the rent going down you also have something called repairs and capital expenses so capex stands for Capital expenses as I mentioned but these are your big repairs so you're heating an air unit you don't spend money on
that every month but every 10 years you might have to spend 8,000 bucks or 12,000 bucks replacing that heating and air your roof is the same way it might be a 30-year roof but if you bought a property with a roof that was 15 years old then 15 years from now you have a big expense same with plumbing same with your driveway everything is constantly deteriorating so it might kind of look on paper like you're not having to spend money at first but these big capex hit you and when they do you have these big
big spikes of expenses I've recently had some five and 10 and even $15,000 expenses and think how how big that chart would be if they go up like that so you have to understand that the rent's going to go down sometimes the C the capital expenses and repairs are going to go up repairs like maintenance are pretty steady so those are not going to change as often as the capital expense spikes but on average and here's the key if you average this out over the long run the line Looks a Lot smoother that's this line
here at the bottom and so you can depend on a over the long run and that brings me to one of the most important first Solutions I'm going to give you several Solutions you can use to start working on smoothing out your cash flow so you can have this be more dependable but the first one that I has been really important for me in my business is having cash reserves and if you visualize it like this think of these gaps you have here or these big spikes cash reserves are kind of like a bucket of
water that you have on the side then every once a while you have to pour it in to fill in the gaps where you're not actually collecting rent so so for example if you're collecting $1,500 per month in rent every single month and you don't have rent that month and if you're really tight and you have to still pay your expenses you have mortgage payments you have taxes you have insurance things like that you can use some of your reserves to cover that same with capital expenses and this is where reserves really come in handy
if you're if you don't have enough cash from your rent because you're not the rent's not coming in to pay for a $5,000 repair you can go into your reserves to have to to cover that so this Reserve bucket is the most important first step if you've ever heard of Dave Ramsey he talks about people in their personal finances having like a baby emergency fund of like a thousand bucks then getting that up to six months of their personal expenses I think is the same way I like to have at least a minimum of 5,000
bucks in a cash Reserve fund just as like a baby Reserve fund but then over time as you get more rental properties you might want to start thinking like three to six months of expenses and I just put that in a savings account it's not a heal it's not you know something some money I could borrow on the side on a credit card this is actual money sitting in a savings account I've made 0% on that for many many years um but then when I needed it it's like an insurance policy I needed this in
2009 I had a bunch of these spikes and had a bunch of these um deficits because people were losing their jobs I had vacancy had a bunch of repairs that I didn't estimate up front that kind of got me and so having reserves is really what saved me in the Great Recession and being able to get through these really big roller coasters of cash flow early in my career so step one understand that this is normal this graph really displays what it's like step two as a solution is to have cash reserves and how much
you have is up to you but I recommend 5,000 bucks as a minimum per property then as you start getting a little bit bigger maybe you can start figuring out three to six months but there's a bigger picture I want to get into now of other ways that you can actually smooth out out the cash flow and make this work for you better both in the short run and the long run so in addition to having reserves as we just talked about you have this bucket of reserves to fill these big gaps from Capital expenses
and rent there's another thing that happens as you grow so you get go from one rental property to two to three to four or even more there's some benefits of you're not just collecting rent on one property you have 2,000 here for example 2,000 on number two 2,000 on rental number three 2,000 rent number four you still have operating expenses which are taxes Insurance maintenance management things like that the everyday normal expenses you're going to have then every once in a while we talked about you're going to have some Capital expenses but what's interesting thing
is that when you have four rental properties let's talk about when you have rent vacancy so let's say rental number one one month doesn't have any rent Well normally you would have you know $2,000 a month minus your 600 expenses uh minus your th000 mortgage payment principle and interest payments it doesn't include taxes and insurance you have about $400 a month in cash flow on that property if it's all full right and let's just say you have the same on all properties so you have $1600 per month in cash flow if everything's going well if
everything things full but let's say one month you don't have the $2,000 cominging from this rental property but you still have the $600 in expenses that you have to pay you still got to set aside money for taxes and insurance you still have to pay your maintenance you still have to pay your management things like or actually management you won't pay because you you don't have any rent coming in but those other expenses are still there and of course you still have your mortgage payment so you still let's say you still have 1,600 bucks that
has to go out well the benefit is you're not just spending money you're not just collecting rent from that one rental you have these other rentals coming in too so maybe you have $400 $800 $1,200 a month in cash flow to help subsidize the one rental that's vacant and this principle works the same way if you have a duplex by the way if you have two two units or fourplex we have four units there's some diversity of rental income if an event happens with one tenant and they're stopping paying or they move out then it's
not going to affect your total cash flow you have some diversity of cash flow so this is a form of growing a benefit of getting a little bit bigger getting out of the one property and into the two three four five properties I still personally like having a small money portfolio but there's a nice uh you I've seen a lot of students in mind people who I coach in my membership at rental property Mastery getting up to a scale of maybe 10 Properties or 20 properties something like that can be a really nice place to
be in particular for this reason the other solution in the short term is to not be afraid to use your job or another business that you have to also fill in those gaps there is no shame especially early in your rental property career that you have these gaps you have rental gaps you have Capital expenses that get bigger you have some cash reserves but maybe you have some months where the capital expenses are even more than your cash reserves you know it's not abnormal to have to feed your rental business especially early on with extra
cash flow from your job extra money from your Biz now I know long run like this is not why we got in the business of rental properties to have to feed this thing we want this thing to be self- sustaining we want it to pay us so that we can actually maybe leave our job or like go part-time or not have to depend on it or so that the ups and downs of your business doesn't necessarily you know affect our lifestyle for me I was a Fix and Flip in The Fix and Flip business early
in my career so I I got into rental properties but first and foremost I got into flipping houses so I'd find really good deals on properties my business partner and I would fix them up we'd flip them make some money maybe we made 20,000 maybe we made 30 40 50,000 other times we flipped a house just as is and made a smaller kind of wholesale profit but the problem with those was we had even more of a roller coaster of cash flow we have like zero some months and then we'd have 50,000 bucks another month
and then we go five months with no money and so it was really stressful and so for us having a business which has up and down cash flow combining that with rental properties was kind of nice so that some months it was good some months it wasn't um so we kind of f we kind of complimented one another but if you have a job one of the biggest benefits you have of having a W2 income is the steadiness of that paycheck so don't be afraid to lean on that early on but what I want to
talk about is early on you do have a lot of these gaps before you get M multiple Properties or even early on just this the cash flow skinnier that's really normal if you have $200 a month in cash flow or $400 a month in cash flow that can evaporate really fast over the short run but what I want to talk about now is the big picture strategy of your rental business and why it is worth buying good rental properties and holding them over the long run I want to show you what actually happens and I'll
give you an example from my own rental portfolio to show you what this cash flow can grow into if you play your cards right over the long run so far we've talked about the short run of rental properties so 3 to 5 years maybe even 10 years you're going to experience some cash flow roller coasters some ups and downs that you can smooth over with reserves with getting multiple rental properties maybe even keeping your day job or having another business but the beautiful thing about rental properties is being a long-term Buy and Hold investor and
I don't know if you drink wine but if you know about wine a really good wine gets better over time if you let it sit it ages and it tastes even better well the right rental property not all rental properties but if you're in a good location you have a good buy box which I talk a lot about here on this channel and you fix a mortgage meaning you use leverage you get a debt over the long run I want to show you a little bit of what happens in that scenario so this chart shows
you again some numbers over time the most important thing though is look at this rent so let's say today's rent is 2,000 bucks over a 20-year period if you have a growth in that rent which in a good area where you have low Supply and a lot of increasing population that can happen your rent could double in the next 15 to 20 years maybe even be more over 5,000 bucks like if you look 20 years ago in the right locations the rent today at 2,000 bucks was probably like 800 bucks 20 years ago so that
is possible if you own a good location so the rent could grow now the the negative of that is your operating expenses and capital expenses can grow you have inflation right so the materials could go up expenses could go up but here's the big the big butt your number one expense as a rental investor look at this in year one in the very beginning is your mortgage payment so let's say you have a $1,000 mortgage payment today you have these expenses of 600 bucks today so remember we had like 400 bucks in cash flow today
but the thing is if you fix your mortgage expense over time that stays 1,000 bucks at year five that stays a th000 bucks at year 10 that stays a th000 bucks at year 15 and 20 while your rent is going up while your operating expenses are going up and the fascinating thing is your cash flow because that big expense is fixed gets bigger and bigger and bigger and it grows over time to be even bigger than your expenses so what was a $400 per month cash flow today might be in 10 years turn into a
$735 cash flow in 10 years it might be ,000 in cash flow like it's getting it's getting even bigger $1,250 in cash flow all the way up to the the 20th year instead of 400 bucks in cash flow you're making $2,700 or so you're like you're making almost 3,000 bucks a month in cash flow because the rents grown and your mortgagees stayed the same and so this is not something you have to do necessarily you have to buy the right property up front you got to get a mortgage payment that you fix over the long
run you've got to get good at man managing and maintaining a good property taking care of your tenants over time those are the things you do but the thing that you benefit from is time you have to be patient over time and this is the reality I've seen is that my properties that 15 20 years ago did okay had those roller coasters even some negative cash flow FL early on are now blossoming and produce a lot of cash flow going forward and I want to show you one specific example of a property where I've tracked
the cash flow over time and show you what I mean back when I was 26 years old almost 20 years ago I bought a 4unit building that needed a lot of work it was completely vacant nobody was living there it had Merry Christmas spray painted across the front of it the carpet was from the 1960s or 70s it even have a chalk outline of a body in unit number three and I wasn't sure it was a joke or this is the real deal point was it needed a lot of work uh I got it fixed
up I borrowed a lot of money to do that I moved into unit number two it became a house hack for me but what I want to show you is I still own this rental property I don't live there anymore and I want to show you specifically this concept I was just talking about how things can get better over time and so the spreadsheet I want to show you you can actually get a copy of by the way if you want to do use this spreadsheet where I evaluate my rental over time and you like
to do this for your own rental properties or to see the the numbers in more detail you can look in the description below either on YouTube or on the podcast and I'll have a link to a freebie you can get this for free uh it's coach carson.com caslow spreadsheet so check that out and get it for free if you want to to look along with me here but the main point I want to show you the top here is rent the middle in the kind of pink color is are the operating expenses and then uh
the there's also Capital expenses here below so just kind of those oneoff bigger expenses like replacing heating and air units refinancing the property things like that but the the thing I want you to see is at the bottom here the the first two years were negative cash flow for me mainly because I was still stabilizing the property fixing it up but I had to Fork over another 6,500 bucks in year one another 6,500 in year two and then finally year three I had $2,200 per year in cash flow that was pretty steady for three or
four years 22 2, 1800 2800 but then it started going down again I had some more Capital expenses came up that I didn't have to do the first few years but that started coming up but I had negative cash flow for three years you know uh well ended my ownership of this property like 8 nine 10 years into the property so that the life cycle of these things still goes in roller coasters that's what I want to show you negative 3200 3,400 negative 2,000 bucks but then the big picture here is if you buy and
hold a property as I told you my mortgage payment if you look at all these years of roller coaster up and down my mortgage payment was the same for many many years 10,112 and then I eventually actually re paid most of that off and refinanced it with a small private loan so I only pay like 4,000 bucks per year right now but my mortgage payment has either stayed the same or gone down so my cash flow has increased significantly so if you look last year 2023 I'm in 2024 when I'm recording this the cash flow
is 14,900 so almost 15,000 bucks per year or $1,245 per month so significantly more than the negative cash flow and even the 2,000 bucks a month or per year I was making early on this is what happens and just think about like your own situation extrapolate this if you had five of these if you had 10 of these and you fast forward yes there's inflation yes things are growing but my cash flow grew a lot faster than the inflation did in the overall market so this is how you build wealth not only did the value
of this building when go up but because I fixed my biggest expenses and the rent grew I was able to really significantly build the cash flow base that I can then live off of and that's the secret with rental properties if you're a Buy and Hold investor the cash flow gets better over time now while just holding on over time is really good as I just showed you I'm not done yet I've got a few more tips that can make it even better can you make it even more cash flow by holding rental properties of
your patient and so I want to talk about actually strategically dealing with your mortgage either refinancing your mortgage or maybe even def financing part partially paying off your mortgage and I've got three ideas here I want to share with you real quickly number one is that right now as I'm recording this interest rates have gone up from what they used to be so you as an investor you might be able to get a 30-year loan at 7% 6.5 sometimes eight% just depends on what kind of loan you're getting but these are higher than they used
to be but that won't always be the case if you're patient interest rates go up and down just like the rest of the market so you can strategically be looking for opportunities to lower your interest rate because if it works today if you have a little bit of cash flow today then if let's say your payment's $1,000 per month at an 8% interest rate well what happens if you know the interest rates go down to 6% and you're patient with that then you could refinance at the exact same amount of debt even if you don't
pull any money out you just borrow and pay off off your existing debt and then have a 6% interest rate your payment would go from a th000 bucks per month to $750 per month that's a plus $250 per month just from being strategic with your refinance that's one idea really powerful idea especially if you do that over multiple properties you can increase your cash flow just like that another thing you can do I had a student do this in my RPM um membership recently was she had a mortgage I'm just going to use round numbers
let's say it was $500,000 on a rental property a dlex and let's say the interest rate was 6% with almost a $3,000 per month payment so uh it was positive cash flow uh when she collected rent but let's see if we can make that even better and she had actually sold another property and she had a big gain from that property and some of the proper some of the money she wanted thought about doing a 1031 exchange and buying another rental but she actually decided just to pay the taxes on that money and she had
net net net some extra money let's call it 100,000 bucks that she decided to come back to her mortgage here anday pay off part of the mortgage and do what's called a recasting if you haven't heard of this this is a way to essentially decrease the payment on your existing mortgage by making a lump sum payment so instead of 500,000 bucks she's paid $100,000 down in principal on the loan and she applied for a recast with her mortgage company which essentially means they're gonna because she'd owned that property and pay that mortgage maybe for five
or 10 years the the payment had gotten higher as a percentage of the loan because the payment stayed the same but the loan went down right so now she's paid the loan down even more but they essentially reamortized the loan so they acted as if they have a 30-year loan they're starting the clock over basically so the payment goes down is is the long and short of that so before she had a payment let's say almost 3,000 bucks now she's got a payment of like 2300 bucks 2,297 so a positive $700 per month or $8,400
per year in positive cash flow so just from asking like the fee for a recast let's say that's 300 bucks or 400 bucks or 500 bucks with your bank you increase your cash flow by $8,400 per year really big deal that especially if cash flows a significant for you so you can strategically do a refinance you can strategically do a recast the last one which I like and is not talked about as much but something I've learned over the years is you can do some strategic refinances to get debt free on some of your properties
that sounds kind of counterintuitive right let me give you an example let's say you have two properties here one they're worth today $325,000 each when you bought the property though it was worth 200,000 and so you've just you've just held on you've been you've been patient and the property's gone up in value and you put 20% down back in the day but you've been paying that loan down for 10 years so today your loan is worth $130,000 this you owe 130,000 bucks you have $850 payment at 5% interest and let's say they're the same on
both properties now how can we improve this you have a good interest rate right you don't you don't necessarily want to pay that off but what I would like to do what I have done on some money properties is I go back and instead of having two loans on two properties that are really low loan to value I have a lot of equity in each of these properties I go and refinance one of those properties so let's say I have get an 80% loan on property number two 80% of 325 is 260,000 bucks let's say
I have to pay a little even a little higher interest rate is 6% and I get a 30-year loan my payment on that 30-year loan for 260,000 bucks would be 1,560 so 1,560 per month my payment combined for these other two properties was 1,700 bucks so I've increased my cash flow because these these loans were heavily into their amortization I'm now basically it's almost like a recast but I'm putting I'm I'm putting my entire loan on one property 1,560 per month but what's kind of cool is I I take this 260 and I'm I'm borrowing
more than I need for that one property so I have excess cash that I can pull out taxfree and I use that money so that extra 130,000 bucks that I don't need to pay off property number two I'm going to take that money and I'm going to pay off the property number one so what have I done I've increased my cash flow which is nice the other thing I've done and this is sort of a risk mitigation strategy which is beyond the topic of this episode but a little little kind extra tidbit here is that
I would rather have one property with a lot of Leverage and then another property with no leverage instead of two properties that are like 40% loan to value my reason and this is just my personal opinion yeah I went through 200 7 2008 2009 and the Great Recession I saw how a lot of banks when when things get really really rough in our economic cycle and I know you never think this is going to happen but let's say you get in trouble and you can't make all your mortgage payments because you lose your job or
something else happens you're not collecting rent well a bank is much more likely to take your property back and foreclose on you and not really negotiate with you if you have a 40% loan to value loan so that's that's a risky position to be in I remember a story a book I read called zindorf um and he talked about how he went through the Great Depression and the people who made it through the depression were either the people who owned their properties free and clear or the people who had the most leverage possible he happened
to be the one with the most leverage possible and the people who had most leverage just went out of business quickly or the banks negotiated with them because they didn't want the property back they're like oh man you owe way too much on that property so people like that end up either just like turning the keys back to the bank and then managing it for the bank or you know they they worked out some kind of recast of the terms the people who really got in trouble where they had a bunch of equity and the
banks like no what is for close on you there's plenty of equity and they didn't negotiate at all so this is a for me this might be something you had thought about but I would rather have this property free and clear no debt and this property with a lot of debt it puts you in a better negotiating position should something kind of rough happen so increase cash flow lower risk in my opinion kind of a cool way to do a refinance to debt-free if you paid your properties down for a long period of time so
remember where we started with this episode you have this up and down cash flow is inconsistent You' even have negative cash flow that can be really frustrating and you can question your strategy but as I've tried to show you here over the long run there are ways to fix that you can have reserves you can buy multiple rental properties to kind of smooth that out you can have other sources of income especially early on makes a ton of sense then over time if you buy the right properties and you hold them and you operate them
well and you operate them efficiently and you fix your biggest cost your mortgage over time things can get better and better and better but there's one thing that I didn't go into I've kind of glossed over it in this entire time is that I assumed you had the right properties I kept on saying that quality properties the right properties so what I want to show you in the next video is something a really piece key ingredient of this whole video I've just showed you is that you got to buy the right property what does that
look like and I want to share with you what my ideal property looks like what the buy box says that's what I call that and if you look above me here there'll be a thumbnail you can click on or you can click on a link in the podcast or YouTube description below that'll take you that video that shows you my exact buy box the ideal rental property that I like to buy so I'll see you in the next video
