What is bet­ter, notes or rentals?

Calhoun Times - - Second Front - By Joey Eng­lish

If you’re like most in­vestors, you have a re­newed per­spec­tive on your busi­ness right now. That’s be­cause you’ve just an­a­lyzed all your rentals, done an in­ven­tory of your cash flow and have got­ten things ready to send to your CPA. We call this process our end-of-year re­view.

Dur­ing this process you’re see­ing what kind of cash flow your prop­er­ties ac­tu­ally brought in. The rea­son I say “ac­tu­ally” is be­cause cash flow is an ever-chang­ing thing that is rarely what you thought it was go­ing to be when you first bought the prop­erty. Prop­erty taxes, in­sur­ance, va­can­cies and re­pairs are the cause of this vari­abil­ity. And as those val­ues go up and down, so will your an­nual cash flow.

This end-of-year re­view is su­per-im­por­tant be­cause it gives you an op­por­tu­nity to see how your houses are per­form­ing. Dur­ing this process you may find that a house you thought was an amaz­ing deal re­ally has a neg­a­tive cash flow be­cause of all the re­pairs you had to make.

We’ve also ex­pe­ri­enced the op­po­site. After eval­u­a­tion, we’ve dis­cov­ered that one of our rentals we thought was an un­der­per­former was ac­tu­ally one of our best houses in terms of cash flow.

In ad­di­tion to look­ing at your rentals, you need to eval­u­ate the notes you have after sell­ing a house with owner fi­nanc­ing.

Notes are a won­der­ful thing be­cause the cash flow on them is not af­fected by ex­penses as­so­ci­ated with rentals. There are no prop­erty taxes, re­pairs or in­sur­ance as­so­ci­ated with them. The only “va­cancy” you can have is a missed pay­ment.

So, when you’re depend­ing on con­sis­tent cash flow to live off of, notes be­come very at­trac­tive.

One of the draw­backs to notes, how­ever, is that one day, they will be paid off. This fact is some­thing you need to make a note of (pun in­tended) dur­ing your yearend re­view.

This year, we had five Lon­nie Deals to pay off. If you don’t know, a Lon­nie Deal is where you buy a mo­bile home on a rented lot for cash. You then re­sell it with owner fi­nanc­ing in which you get $1,000 down and pay­ments of $300 a month for 42 months.

Since our nor­mal Lon­nie Deal pay us about $300 a month, that means at the start of this year we have $ 1,500 less in monthly in­come from our notes than we did last year.

Ouch – $1,500 a month is a lot of gro­cery money gone!

On our rental prop­er­ties, how­ever, all of our rates have in­creased. We have had very low turnover and have filled va­can­cies mostly on our new ac­qui­si­tions.

So, with these sce­nar­ios in mind, what would you rather have: notes or rentals?

The an­swer to that ques­tion is that you should have both. You see, there are ad­van­tages and dis­ad­van­tages to any in­vest­ment strat­egy. The big­gest ad­van­tage with notes is they pro­vide con­sis­tent cash flow. The dis­ad­van­tage is when those notes even­tu­ally pay off, that de­pend­able in­come stream stops.

Rental prop­er­ties come with the ad­van­tage of pro­vid­ing in­come as long as you have a good ten­ant in place who’s pro­tect­ing and pay­ing for the prop­erty. There are also tax ad­van­tages as­so­ci­ated with rentals, like de­pre­ci­a­tion, that you don’t re­ceive from notes. But houses need re­pairs. And even though house val­ues and rents tend to go up, so do your taxes and in­sur­ance. These ris- ing costs chip away at your monthly in­come.

So, as you ask your­self which in­come stream is bet­ter, re­al­ize you need both for a com­plete port­fo­lio. As notes are paid off, your rental in­come fills the void. But when you have va­can­cies and re­pairs on your rentals, you can count on the con­sis­tency of your note in­come.

With that in mind, Ash­ley and I need to get to work re­plac­ing that $1,500 in lost note in­come. That re­minds me, does any­one have a mo­bile home for sale?

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