Looking at Cash Flows

Real estate through the years has offered investors one of the most diverse and most profitable ways of accumulating wealth and income. With real estate, you can see it, you can feel it, you can use it, you can put it to work for you to produce income, it increases in value, it gives tax shelter, it is safe and some is very liquid. It can work exceptionally well and be an integral part of your investment goals.

All real estate has expenses associated with owning it. The operating expenses for income producing properties can include the following: Accounting, Advertising, Legal, Insurance, Janitorial, Lawn Care, Leasing Fees, License Fees, Office Expenses, Pest Control, Property Management, Property Taxes, Repairs & Maintenance, Resident Manager, Salaries & Wages, Snow Removal, Supplies, Telephone, Trash Removal, Travel, Vehicle Expense and Utilities.

After all the expenses of a property are paid from the rents, what is left over is the NOI or Net Operating Income. If you divide that number by the asking price of a property you get the Cap Rate or Capitalization Rate (free & clear return). For Example: If you paid $1,844,000 for a 32 unit apartment building with an 8% Cap Rate, you would be getting $147,520 return on your investment after all the expenses are paid, which is your Net Operating Income. This brings up a couple of questions. Has this been a consistent number through the years? Is this a typical Cap Rate in the area at this time? Are there any deferred maintenance or other large expense issues coming up?

If you are in the process of transitioning cash into other assets, income producing real estate can be an outstanding vehicle to protect your investment and at the same time give you a good return in cash. If you purchase free and clear income producing real estate, historically it will keep up with inflation both with appreciation and with cash flows. By transitioning cash into a hard asset like real estate, you are not only going to maintain the value of your principle, but in many cases you will receive a cash return that is hard to rival with other investments.

Bars in Montana

Bars in Montana offer some unique opportunities when it comes to owning and operating a business. Although there are a number of types of licenses in Montana, the two most frequently used are the All Beverage with Gaming and the Beer & Wine with Gaming. Since the mid 80’s Montana has allowed holders of both types of licenses to operate a combination of up to 20 video poker & keno machines (starting in 2012, Video Line Games – “Las Vegas style Slots”) per license. The two major differences in the licenses are: 1) All Beverage can serve full liquor as well as beer & wine whereas the Beer & Wine is limited to just beer & wine, and 2) A person can hold only three All Beverage in their name (effective 10-1-13), but can own multiple Beer & Wine licenses.

In the mid 80’s when video gaming started, All Beverage Licenses in Billings were selling for around $100,000. In the larger communities in Montana (Billings, Bozeman, Helena, Great Falls, Missoula and Kalispell) license values began climbing to a point before the recession in 2008 when All Beverage Licenses were selling as high as $1,000,000. This increase was due primarily to gaming and the fact that each community is set up on a quota based on population which meant the market and availability dictated the value.

Why the increase? Gambling revenues for the state peaked in 2008 at $423 million gross income on 18,350 machines ($23,042/machine) which the State of Montana received 15% tax on amounting to over $63 million. Revenues had dropped to $358 million by 2012 on 16,649 machines and license values in Billings are currently running around $600,000 for All Beverage w/gaming and $350,000 for B&W w/gaming.

Here’s how the numbers work. The key number on a 20 machine operation is the weekly Drop (the total amount of money going through the machines every 7 days). What is left at the end of each night is the Hold (the money left after all payouts have been made). This is the number that the State of Montana Taxes 15% of on a quarterly basis. The Hold fluctuates but for this example we will use 25%. Example: 20 machine drop @ $50,000 per week = $2,600,000/yr x 25% Hold = $650,000 Gross Revenue Less 15% State Tax ($97,500) = $552,000 Gross Profit for the license holder. If the license holder owns the machines, they keep it all. But, if the license holder uses a vendor, the vendor owns the machines and splits the Gross Profit with the license holder 80-20 to 60-40 (negotiable) with the larger % going to the license holder.

Drops around the state for 20 machine operations vary greatly from $25,000-$30,000 per week to a few at $75,000-$95,000 per week. To utilize the full potential of a license, successful operators serve beverages, food and operate a casino. In the case of a All Beverage License, you can operate a full bar, serve food and operate a 20 machine casino with each area providing it’s own income stream and profit center. Good operators can make a very good living by maximizing the potential of their license, keeping their costs in line and providing quality food, beverages and service.