How much cash flow does Nomad generate?
The amount of cash flow that Nomad generates depends on a number of factors. Here is a partial list of some of the factors.
- Your real estate market
- Price of homes you're buying
- Rent for homes you're buying
- Interest Rate
- Down payment (and whether you have private mortgage insurance)
- Expenses like property taxes, insurance, HOA, maintenance, capital expenses
- Property management (whether you do it yourself or hire it out)
- Whether you're renting or offering lease options
- Type of loan you're getting
Will I have positive cash flow in the first year with Nomad?
First, before I get into answering this question… I want to clarify the question. With Nomad you move into the property for the first year and most people are not renting the property in the very first year since they're living in the property. I am interpreting this question as, “will I have positive cash flow in the first year I rent the property with Nomad?” That's really the second year. It is also possible you could get rent and therefore positive cash flow the first year you're living in the property as well by getting roommates or buying a duplex, triplex or fourplex.
So, to answer the question of whether you get positive cash flow the first year you rent the property: in many markets including Northern Colorado you will not have positive cash flow with Nomad in the first year if you're minimizing your down payment.
In many markets, if you were to put 20% down instead of minimizing your down payment you would have positive cash flow in the first year. Since many Nomads are putting down 5% instead of 20%, the lack of positive cash flow is really you financing the 15% down payment that you did not put down. In other words, you're paying the 15% more down payment that some people argue you should have put down over time by not having positive cash flow up front.
If you include the tax benefits of depreciation, often you'll be net positive with tax benefits in the first year you rent the property.
You can model how much cash flow you might have with the Nomad model by using the Real Estate Financial Planner™ software. I have charts specifically showing you the estimated cash flow for the first year you rent the property.
When will I have positive cash flow with Nomad?
It really depends on a number of factors and whether you're considering cash flow to include the cash you receive from the tax benefits of depreciation.
In some markets, you'll have great positive cash flow from day 1 even with 5% down without taking into account the tax benefits of depreciation. In many markets with proper property and loan selection and good property management, you can often have positive cash flow within a few years without taking into account tax benefits and you'll be positive from day when you take into account tax benefits.
Does cash flow include tax benefits?
It depends on the context of the discussion. Most of the time when I talk about cash flow when describing Nomad, I am talking about cash flow by itself without taking into account tax benefits.
If I am going to include the tax benefits of depreciation and how they improve cash flow on your property, I will usually go out of my way to clarify that I am including depreciation.
When talking to people about whether or not you're including depreciation, I think it is only fair that you tell them whether you're including depreciation or not. Some people might use the term “after tax cash flow” or something like that. I personally find this a little vague and would rather explain what I mean.
How do I improve cash flow on my rentals?
I have an entire class I've taught before which I called “Cash Flow Explosion: Tips on Improving Cash Flow In Your Real Estate Investments” and an article about the class called How to Improve Rental Property Cash Flow where I cover in detail how to improve cash flow on rental properties (that would include Nomad).
I will be teaching a slight variation of this class for Nomads as well at some point in the future. In the meantime, I'd recommend referencing that article to see my recommendations for improving cash flow on your rentals.
Does interest rate affect my cash flow?
Yes. The interest rate you get affects what your monthly payment will be and therefore impacts how much cash flow you will have with your rental property.
Does down payment affect my cash flow?
Yes. The amount of down payment you put down when purchasing a property impacts a few things which affect cash flow.
First, in general and there are exceptions to this, the more down payment you put down the lower your private mortgage insurance will be. The lower your private mortgage insurance is, the better your cash flow will be.
Second, the more down payment you put down the smaller the amount you're borrowing and therefore the smaller your monthly payment will be and, finally, that will improve your overall cash flow.
Third, the more down payment you put down the better your interest rate is likely to be and that will improve your cash flow as well.
So, while we spend a lot of time talking about minimizing down payment with Nomad, there are definitely times when using a larger down payment make a lot of sense.
Does property taxes affect my cash flow?
Yes. The property taxes on your property definitely impacts cash flow. The more your property taxes are the lower your cash flow is since property taxes are an expense on your rental property.
Pay your fair share of property taxes to support the infrastructure in the area you live, but make keep an eye on your property tax bill and make sure it is appropriate for your property and the true property value.
Does insurance affect my cash flow?
Yes. The higher your landlord insurance policy is the lower your cash flow will be. Make sure you have an acceptable balance between paying a reasonable rate for reasonable coverage on your property. You don't want to pay too little to find out you're under insured in case you do need to make a claim, but you also don't want to overpay for too much coverage.
Does HOA affect my cash flow?
Yes. The amount of your HOA can affect your cash flow on a property. Be aware that in many cases and many real estate markets it is not normal to charge the tenant the amount of the HOA especially if the HOA covers things like maintenance on the property that would normally be covered by the landlord. However, and it is a big aha for a lot of landlords… sometimes HOAs include things that tenants would normally pay for. For example, some HOAs in our local market include basic cable TV in the HOA. And, so you might be able to “charge back” to the tenant part of the HOA fee for services that are included in the HOA to help improve cash flow.
Does maintenance affect my cash flow?
Yes. In this context, I am referring to the amount of money you set aside each month for maintenance on your properties out of your monthly cash flow. This has an impact on your cash flow on your rental property. The more you set aside for maintenance, the less cash flow you're likely to have in the short term.
However, properly maintaining your property will, over a longer period of time, keep the income you're earning on your property high and probably improve cash flow.
Does capital expenses affect my cash flow?
Capital expenses (often abbreviated CapEx) are improvements made to the property and they can definitely reduce the cash flow on your property. With Nomad we are very concerned about capital expenses and talk about it a lot especially when we talk about using lease option exits with Nomad to reduce capital expenses.
Does property management affect my cash flow?
Yes. This question could be answered in two ways.
First, managing your property prudently, responsibly and correctly will improve your cash flow.
Second, paying for property management (often to a professional property manager) will impact your cash flow since it is an expense. Although, I have a number of anecdotal points of evidence showing clients of mine that were managing properties themselves and when they finally went to a property manager and hired them manage their property, they realized just how below fair market rent they were. Many of them found that they could get more cash flow by hiring a professional property manager even when you take into account the property manager fee. If you're already maximizing rent, you may not be able to accomplish that.
Does vacancy affect my cash flow?
Yes. We emphasize the importance of minimizing vacancies with Nomad by encouraging you to find your next tenants at least 60 days in advance. This helps to ensure you're maximizing your cash flow.
Does up front lease option fees affect my cash flow?
When we talk about using lease options exits with Nomad, we often talk about the up-front lease option fee that a tenant buyer pays to be able to lease a property with the ability to buy the property from you. Some Nomads will opt to consider that option fee as cash flow on the property. Even collecting $2,400 as an option fee (which for most properties would be conservatively low), that improves “cash flow” by $200 per month if you apply the $2,400 over the first year.
In markets where there is likely to be significant negative cash flow, this is one of the primary strategies we consider as a way to improve cash flow.
Does offering my property on a lease option versus offering it as a straight rental affect my cash flow?
Absolutely. Offering your Nomad properties on a lease option where you allow a tenant buyer to rent the property with the option for them to buy it from you in the first year or two can have a significant positive impact on your cash flow on a property in three primary ways.
First, often you'll collect an up-front option fee that grants the tenant buyer the option to buy the property. Many Nomads will consider this as additional cash flow on the property.
Second, often the monthly rent you can collect from a tenant buyer is higher than just straight rent. In other words, depending on how you structure your lease option, you can see more than fair market rent monthly. This improves cash flow.
Third, often when you're offering properties on a lease option and selling them every few years, you avoid large capital expenses. This can have a significant positive impact on cash flow when compared to holding properties for a long period of time and having to pay those capital expenses.
Should I buy a property with negative cash flow?
If I had to answer this question in a vacuum, I'd say, “no… you should not buy properties with negative cash flow.” However, in many markets, if you're putting 5% down to acquire a property as a Nomad, you're going to have negative cash flow. How can I say both?
If your market has opportunities for you to buy rental properties with positive cash flow with Nomad down payments from day 1, that's perfect. Go for it. If your market does not have these opportunities, then you have some decisions to make. Do you have the resources to utilize more down payment to get positive cash flow? Or, are you willing to “finance” the down payment you should have put down if you wanted to eliminate negative cash flow?
Many folks after seeing and understanding the math, are willing to take on the risk of buying a property with negative cash flow to get the other benefits of owning real estate like depreciation, appreciation and debt paydown. I'd also advise people that are going to buy properties with negative cash flow to utilize strategies we discuss for improving cash flow like using lease option exits to mitigate the additional risks of negative cash flow.
Can I generate positive cash flow in the first year?
In a previous FAQ, I answered a variation of this question where I assumed that people were asking me if they could generate positive cash flow in the first year they're renting their Nomad property. That's usually the second year you own the property because with Nomad you're living in the property the first year.
In this case, I am going to answer it as whether or not you can generate positive cash flow on a property in that first year when you're living in the property as an owner occupant Nomad. To answer that question: yes. It is possible for you do things that will generate positive cash flow on properties in that first year when you're living in the property. For example, you could find roommates and rent out bedrooms. I have several Nomad clients doing this. You could also buy a duplex, triplex or fourplex and generate positive cash flow from renting out the other units.
What do you mean by negative cash flow?
When the expenses on your property exceed the income you're receiving on the property, we consider that to be negative cash flow.
The following is a pie chart showing all the expenses I am referring to.
Some people will incorrectly assume that cash flow is calculated with just mortgage payment, taxes and insurance. Some might throw in HOA. They fail to include things like vacancy, maintenance, utilities (if you're paying any) and property management. These additional expenses should be included when we talk about positive cash flow on a property.
What do you mean by positive cash flow?
As I discussed when I described negative cash flow, positive cash flow is when you take all the income from the property and subtract all the expenses there is a profit left over for the owner.
The following image shows the expenses I recommend you consider when calculating whether or not you have positive cash flow.
Do I count a lease option fee as cash flow?
Most of the time, yes… I would consider the up-front fee you accept that allows a tenant buyer to lease a property from you and grants them the option to buy the property as cash flow. There are some cases (outside of Nomad), where I would look at it a little bit differently. One example, is when buying a property from the MLS that was selected for a specific tenant buyer and offering that property on a lease option, I might think of the up-front lease option fee as a rebate on my down payment instead of as cash flow.
Does cash flow change over time?
Yes. Cash flow definitely changes over time. As the income you're collecting on a property changes, so does the cash flow. As the expenses you have on the property change over time, cash flow changes as well.
Is cash flow fixed on a property?
No. Cash flow on property can vary over time. It is not fixed and will rarely be exactly equal to what you model. Sometimes it will be better (when you were conservative in your estimates) and sometimes it will be worse (when something unexpected happened or you were not as conservative as maybe you should have been).
Does cash flow vary from property to property in an area?
Absolutely. Cash flow is different from property to property and even landlord to landlord. You may buy a property and manage it one way that results in a certain cash flow. I may buy it and manage it differently and get different results.
Does cash flow change over time?
Yes. Cash flow on properties can change over time as market conditions change (like rent). It can also change as your expenses on your property change. For example, your taxes, insurance, and maintenance on your property might go up over time (as we model for with the Real Estate Financial Planner™ software).
Do I get cash flow monthly?
In most cases, yes. You will be collecting rent monthly and using that to pay your expenses on your property monthly. If you're doing as we recommend, you'll also be setting aside money from your rent monthly into an account for maintenance. If you have positive cash flow after paying your expenses, you'll “get” that cash flow monthly.
If you were to think of the tax benefits of depreciation as extra cash flow, you could choose to receive that monthly as well by adjusting the number of exemptions you're claiming on your tax return to reduce the amount of tax they're taking out of your paychecks. In other words, you could (hopefully with the help of your tax advisor to make sure you're doing it correctly) change the number of exemptions you plan to claim on your tax return. By doing this, your employer will collect less in taxes out of your paycheck since you're not going to need to pay those taxes. This will increase the amount you bring home in each paycheck, converting the tax benefits of depreciation into more of a monthly (or whatever your pay period is at work) benefit instead of a once a year benefit.
Can I spend positive cash flow?
Yes. You could. I do recommend to Nomads that if you've been getting by without positive cash flow on your rentals before you started Nomad, you may want to put the cash flow from your Nomad properties into a savings account and build up a healthy cash flow buffer instead of spending it.
While you can totally do the Nomad model with the minimal cash reserves, I would strongly advise that you maximize your cash reserves instead.
Should I save positive cash flow from Nomad?
In my (strong) opinion… yes! I am big believer in having very large cash reserves, so I'd encourage you to save your positive cash flow.
What is cash flow?
Cash flow is the difference between your income on a property (like rent or income from coin operated laundry units often found in multi-unit properties) and your expenses like your mortgage, taxes, insurance, vacancy, maintenance, HOA, property management and utilities.
Does my credit score affect cash flow?
Yes. Your credit score will affect what loan and what interest rate on that loan you can get. The loan type and interest rate affects the monthly payment on the loan. This expense directly impacts your cash flow on a property. Better credit scores tends to improve your cash flow for this reason.
Does a bankruptcy affect cash flow?
Yes. If you’ve had a bankruptcy, for at least a period of time, it will impact which loans you can get and that will impact your cash flow.
Does a short sale affect cash flow?
Yes. Short sales, at least for a short period of time, will impact which types of loans you can get and that will impact cash flow.
Do foreclosures have better cash flow?
Buying a foreclosure property will not automatically provide better cash flow. It is true that in some markets, foreclosures are often sold with opportunities for you to capture some equity by doing repairs on the property. Buying at a discount can mean that you have a smaller mortgage balance and therefore a smaller monthly payment. This will improve cash flow.
Does a foreclosure affect cash flow?
Yes. If you've had a foreclosure, it can impact the type of loan you can get. This is usually true for a relatively short period of years after your foreclosure. The type of loan you can get may impact what your interest rate and therefore what your monthly payment will be. The monthly payment is an expense that will directly impact your cash flow on a property.
Do short sales have better cash flow?
In some markets, buying a property where the lender is willing to accept less than what is owed on the property to allow a sale results in your ability to buy a property that you can add value to. This often looks like you're buying a property below market with a lower mortgage balance than if you had bought a property for full retail. This means you're monthly payment is lower and therefore your cash flow is better.
Do fixer uppers have better cash flow?
In many markets, you can buy properties that need work. We might call these properties fixer uppers. These properties are often bought at a price where you're creating some equity for the work you've done (or had done) on the property. The work you've done “manifests” or shows up as you having bought the property at a discount from retail price. Another way of me saying this is: you bought the property at a discount because it needed work. As an aside, there is probably an entire class on why I went to great lengths to describe it the other way to start. It was intentional. But I digress… back to the question: yes… buying a property that needs work often results in you having a lower mortgage balance which means you have a lower monthly payment which consequently means you have better cash flow.
Will variable rate loans have better cash flow?
Variable rate loans often are lower than the fixed rate financing you could get at the same time. Since interest rates often are a major factor in determining what the monthly payment will be, this often means that the monthly payment on variable rate loans will be lower than fixed rate financing (at least to start with). This means that you'll have better cash flow.
I will point out that there are several other considerations on whether to choose a variable rate loan over fixed rate financing. It is part of a bigger discussion than just which has better cash flow.
Will fixed rate loans have better cash flow?
In the short term of selecting the loan, fixed rate loans will likely have higher interest rates than the variable rate loan options you can get instead. So, in the short term, fixed rate loans will likely have worse cash flow than the cash flow you could get if you had selected a variable rate loan.
However, if interest rates rise and the interest rate on your variable rate loan increases, the cash flow could reverse. If your variable rate loan (because of rising interest rates) suddenly has a higher interest rate than the fixed rate loan you could have gotten at the same time, the cash flow from fixed rate loans would be better.
Will interest only loans have better cash flow?
In most fully amortizing loans, part of the payment goes toward the interest due for that month and part of the payment goes toward paying down how much you owe on the loan. With interest only loans that's not the case. With interest only loans, you're only paying the interest that is due for that month and nothing additional toward principal.
So, interest only loans tend to be lower overall payments than a fully amortizing loans (what most people would consider “regular 30 year fixed loans”). Because the payments on interest only loans are lower, they can (sometimes significantly) improve cash flow.
Realize you're trading the return you'd normally be calling debt paydown and converting it to a return from cash flow. Which, in some cases I would totally recommend doing. Important note… I said “some cases”. This is not what we normally recommend Nomads do.
Will buying down my interest rate affect cash flow?
Yes. Some Nomads will opt to pay their lender some additional money up front to get a lower overall interest rate. This lower interest rate will result in a lower monthly payment and improve cash flow.
What does interest rate affect?
Interest rates affect the monthly payment on a loan. That, in turn, affects your expenses on your property–and typically your largest expense (the mortgage payment). This affects your cash flow which also affects your cash on cash return.
Will buying new construction affect my cash flow?
Yes. Buying new construction can affect your cash flow in several ways.
First, buying new construction will often allow you to get a slight premium on rent. More income usually means more cash flow.
Second, since everything is brand new with new construction you tend not to have immediate capital expenses (like new roofs) and the maintenance on the property tends to be super lower for the first few years (especially with a builder's warranty). While I recommend you set aside your regular maintenance fund to build a healthy reserve and cash buffer, some people opt to lower the amount they aside for maintenance. This can improve cash flow.
Third, in some cases your insurance on a brand new home may be slightly lower then insurance on older homes. This can improve cash flow as well.
Will buying cheaper properties improve cash flow?
Probably. In most markets, cash flow (not taking into account capital expenses) tends to be better on the lower price range. The ratio of rent to purchase prices tends to be improve cash flow. There is a chart from Gary Keller et al from his book The Millionaire Real Estate Investor that shows this as well.
However, and it is a big however, I do not recommend you invest in the absolute lowest price properties with Nomad.
Will buying more expensive properties improve cash flow?
Not usually. Usually cash flow gets worse as price increases.
How does using lease options improve cash flow with Nomad?
Using lease option exits tends to improve cash flow with Nomad in four ways.
First, you can usually collect an up-front fee from the tenant buyer to allow them the option to purchase the property from you. This can and is often thought of by Nomads as additional income on the property like cash flow even though you're usually getting it all up front. In some rare cases, you might even collect some or all of this monthly.
Second, you can often get rent that is higher than fair market rent. This is especially true if the payment they would be paying if they were financing the property would be higher than what rent is. This improves cash flow.
Third, often with tenant buyers there is a higher expectation that they will provide maintenance on the property. Of course, as the landlord, you still have ultimate responsibility for maintaining the property, but someone who will be owning the property (the tenant buyer) has a different standard than just a straight tenant. This can improve cash flow.
And fourth, capital expenses like roofs, furnaces, kitchen/bathroom updates can be significantly reduced or eliminated by selling properties before these expenses are due. Not having to pay out $10,000 for a new roof every 15-20 years can significantly improve cash flow (and overall profitability) of properties.
Do you count depreciation toward cash flow?
You could. Cash flow traditionally does not include depreciation, but if you're careful to disclose what you're doing and explain it carefully, I think you could show how the tax benefits of depreciation can be considered extra income that you receive in the form of less taxes paid and how that could be considered a cash flow like stream.
Will I have negative cash flow in my city?
Maybe. In many cities, you're likely to have breakeven or even negative cash flow if you're minimizing your down payment for the Nomad model.
It might be best to contact a local real estate agent (like me in Northern Colorado).
Does my Earnest Money affect cash flow?
No. Your Earnest Money is not really related to how much cash flow you'll get on a property.
For more information about Earnest Money, check out The Ultimate Guide to Earnest Money to learn more.
Does the lender I use affect cash flow?
Yes. Lenders have different loan programs and different fees associated with getting a loan. The loan you get and the cost to get the loan (to a lesser, indirect degree) can affect your monthly payment and therefore the cash flow you can get on a property.
Does the insurance agent I use affect cash flow?
Yes. Different insurance agents can offer different insurance products and at different costs. This is a direct expense and so it can directly impact cash flow.
Does the real estate agent I use affect cash flow?
Yes, although usually indirectly. Most of the time, the real estate agent you use will cost the same since the overwhelming majority of real estate agents are paid the offered cooperative commission from the seller's agent. Since most are paid the same (and no extra cost to you), that is not what typically impacts your cash flow.
What does impact cash flow is the help a real estate agent offers in finding and helping you analyze properties to buy. Their expertise in property selection and analysis can often improve the overall cash flow return you'll see or their lack of expertise could allow you to select a property that has less than ideal rental characteristics.
You could also argue that a strong real estate can help you negotiate a better deal on properties as well. This can also improve cash flow.
If I have more down payment to put down, should I?
Maybe, but probably. Putting down the absolute minimum can maximize your leverage and improve your return on investment, but putting more down payment can improve your cash flow. Improving cash flow can help you qualify for additional loans and reduce the risk of negative cash flow.
Will private mortgage insurance (PMI) affect cash flow?
Yes, private mortgage insurance (PMI) is insurance you pay for to protect the lender in case you default on the loan. It is often required on loans where you are putting down less than 20% (which is many of the Nomads that are putting down the 5% we model).
PMI is often paid on a monthly basis and can reduce your cash flow.
Should I put 20% down to improve cash flow?
Putting 20% down will improve your cash flow in three ways.
First, if you put 20% down instead of 5%, you're borrowing a smaller amount of money. If you're borrowing a smaller amount of money, your monthly payment is lower and so your cash flow tends to improve.
Second, if you put 20% down you're likely to eliminate private mortgage insurance (PMI). Eliminating the expense of PMI usually improves cash flow.
Third, if you put 20% down, you'll tend to get a slightly better interest rate. This means you're likely to have a smaller mortgage payment. This will also improve cash flow.
So, if improving cash flow is important to you (and it should be) and you have enough money to do the Nomad model to the extent you'd like to, then I'd strongly consider putting 20% down.
Should I put 20% down to get rid of negative cash flow?
Personally, if you have the ability to put 20% down and still have enough cash reserves and down payment to accomplish your goals, then I'd strongly consider putting 20% down to get rid of negative cash flow.
Does Nomad work in every city?
While it is possible that we will eventually find a city where something about Nomad does not work there, I have not yet found a city where it does not. You may have negative cash flow that we need to come up with some solutions to mitigate that, but as far as I know, it does work in every city.
Should I invest in stocks or Nomad?
That's a personal decision and one that I am not sure should be an either or. I personally think that investing money in stocks and Nomad for most people would make a lot of sense.
Long term, the cash flow benefits of Nomad are much more attractive to me than investing in stocks, but I think that having a portion of your investments in the stocks (or other non-real estate assets) is probably prudent.