I was wondering what is the % of cash flow to rent? Is $50 amonth cash flow reasonable or should there be a standard of at least $ 100, $200…?
So I am not misunderstood I am talking cash flow. not after PITI.
Thanks for any thoughts
Phil
I think each landlord needs to make a personal decision as to “reasonable”. Reasonable for me may not be reasonable for you. When I was doing rentals in Louisiana, I looked for at least $125 a month ($1500 a year) per SFH. Most of our generated more but I wouldn’t even consider one that generated less…
Keith
I agree with kdhastedt. There are a few factors I use depending on the property, but $100 a unit is the standard that a good investor will require. If the property is in a questionable neighborhood than I require much more than $100 a unit. If the property is newer and in a good neighborhood than I would take $100 a month. The area of the country you invest in and your current market will determine what is reasonable for you individually. Some investors live in an area where they would love to have a property even breakeven, while others like myself invest in an area that has more room for profit.
If you cash flow the property and it is in the positive than it is on you to decide if it is worth it.
Is cash flow your only consideration? For some people it is, but do not underestimate the power of depreciation or appreciation. Lots of folks do rehabs, and the place is vacant for the entire time they own it. I also think you can have negative cash flow, but at tax time, you can write off so much that the deal still makes money (or saves on tax expenses). I believe that many people overlook depreciation in their cash flow analysis.
I also think that people buy in bad neighborhoods in the name of cash flow and wind up losing money because they made $250.00/month, but the property value dropped $50,000. If your consideration of cash flow included someone else managing the property, and your strategy was buy and hold, then that $50,000 wouldn't matter, but if you wanted to 1031 up to commercial or a nicer property, your hands would be tied.
If you’re in the Rental Prooperty business, cashflow is KING…period.
The tax treatments and appreciation should be treated as “icing on the cake”!
Buying property in the hopes of appreciation is not investing, it is speculation!
Depreciation is a tax paper drill and will be recaptured at some point and appreciation in many areas right now is negative or negligible.
Keith
I would like to go on the record and say “DITTO on Keith’s comments!”
Real estate investing should be a SURE THING, not gambling!
Mike
Thanks for the input.
I really have no intention of holding real estate for rental but could be a possibility in the future.
What I know is construction and can rehab house efficiently and cost effective to those that hire contractors like me.
The perspective I have is that I can make more money rehabing than being a landlord. If you think that my outlook is foggy I would enjoy feedback of any kind.
Phil
There is Rich and then there is Wealthy. Yes you can make a lot of money doing flips. The difference for me is that the rental and continually make me money (rent) and also once I have more than 40% equity in the house I can refi and now my equity will make me even more money buy allowing me to invest in other rental houses. It is my belief that this is the truest path to wealth. I would rather be wealthy than rich.
Benjie
Benjiej, thanks for the comments.
Can you tell me when does the borrowing stop?
As Keith mentioned I am a firm believer that CASH IS KING and that no debt is better than debt. But I also know that it is very hard to do.
Only my opinion.
What happens when…
Purchase and rehab…$80k
Rent …$850
PITI…$650
Expenses/ month…$75
Cash flow…$125
At $6000 (approx.) a year goes to the principal plus an average 5% increase in property value= $4000k.
It takes at least 2 to 3 years before you can get t a point at which to, by your standards, refi.
Do you Refi for 80%, 90% 100%? plus closing cost.
Maybe you can explain to me further how you are making money at such a senario?
I do believe in the grand scheme of things that rental property has a place in your real estate portfolio. but I do not think in my case it will be the main stock.
This is why I asked the question because I know rehabing but LL I do not know much about.
Thanks for all the input.
Phil
Phil,
The numbers in your example are WAY OFF! If you buy at property for $80K with rents of $850, it will have a negative cash flow when you include the real world expenses. However, in answer to your question, the money is made in rentals with quantity. Assuming that you don’t use your own money, you might be able to get an average of $100 per unit per month positive cash flow. Therefore, if you want to make $10,000 per month, you need 100 rentals! If you do both the management and maintenance yourself, you will earn (save) at least another $100 per month. In this case, you could make $10,000 per month by owning 50 rentals.
I do not refi. I am allowing the mortgages to be paid down and my equity to increase.
With rentals, you make money at least 5 ways:
- CASH FLOW (the king)
- Equity at closing
- Principal Paydown
- Appreciation (icing on the cake)
- Tax depreciation and other tax benefits
Contrast that to flipping, where you must continuously work to generate income. Then, when you do make a profit, uncle Sam takes a big bite.
That’s why I like rentals.
Mike
I know Property Manager has already answered you but I thought I would answer you also. In your house example,
"Purchase and rehab…$80k
Rent …$850
PITI…$650
Expenses/ month…$75
Cash flow…$125"
You are pretty much buying a rental house at what maybe a 15% discount. Unless you are buying it for cash you cannot get a positive cash flow out of this. As Property Manager has said you are not accounting for every thing. First 50% of the gross rent is going to all those hidden fees and some not so hidden. So out of the 850 only 425 can go toward your profit. Now you can’t forget about the Piti which is at 650 so your 125 cash flow is actually -125.
For this house you are talking about I wouldn’t pay more than 42,500 less the cost of repair. Property Manager has a formula of dividing the Rent by .02 and they will give you a good purchase price. These are hard to come by in my area but they are possible with patience. Property Manager chooses to pay off his mortgage which gives him an increased cash flow. I will refi my first few homes so I can get more money for reinvesting. Now I will not do these with all my houses but only with the first few and then I will be where Mike is and able to buy homes with OPM.
Benjie
Just remember We make money when we buy property not when we sell it…we lose money holding negatively cashflowing property…we build wealth holding property. If you want to be rich, hold your positive cashflow property, If you want an endless job, buy and sell,buy and sell, buy and sell, buy and sell… and that is exactly what happens if you never buy and holdddddddddddddddddddddddddddddddd.
I just wanted to throw in another 2 cents. We both flip houses and have multi unit rentals. Flipping houses puts cash in your pocket now, so you can quit the day job, whereas with rentals the cashflow is something you build up over time.
All of our rentals are for sale,too. The intention with them is to do 1031 exchanges up to bigger properties, hence bigger cashflow. Also, with bigger properties you can get out of self managing, which is what most of us do that have 1-5 unit properties.
I think that is the goal for most of us, to have big cashflows and let someone else have the headache of managing.
Matt
Thanks for the advice everyone.
I’m just trying to figure out what direction to go and how to actually start.
One thing though, does anyone feel that flipping for a while to get cash then moving on to rentals is a good start?
I do want to build weath but as someone mentioned that you would need a number of rentals to begin to have some kind of satisfactory income. How is the best way to start, 1 or 2 houses or try to bye a rental every couple of months for a while until you get to your desired number?
I was very much only about rehabing when I joined this site and no I feel a little different only do to the fact that you do have to buy and sell and buy and sell. Rental property seems to be a hands on issue in that you need to do your own management and repairs to make any money. Am I correct or not?
I am a firm believer that debt is not good and that paying cash is the way to go. How do you manage your debt ratio? Owing millions of dollars does worry me. Maybe someone could inform me on how debt can make you money?
I know this is a lot of questions to post but I do believe that if you don’t know ask someone who does.
Thanks
Phil
Why do one or the other? Rehab some houses and hold whatever properties make sense to hold as rentals. You’re going to get your best deals on rentals rehabbing neglected buildings that need moderate work. Perfect rentals that have no issues don’t cashflow, they are often as much as double what you should pay to get positive cashflow.
I was very much only about rehabing when I joined this site and no I feel a little different only do to the fact that you do have to buy and sell and buy and sell. Rental property seems to be a hands on issue in that you need to do your own management and repairs to make any money. Am I correct or not?
PNC,
Yes, rehabbing is about buying and selling (and paying taxes) and buying and selling (and paying taxes). When you stop or can’t find a deal, the money stops coming in. Rental properties are a hands on issue. You can make maybe $100 per unit per month (or $150 if you work extremely hard), so how many rentals does it take at $100 per month for you to comfortably live on. You can short-cut the process by doing the management, maintenance, and rehab work and this will double your money (or even a little better than double). It doesn’t change the cash flow, you are EARNING the difference.
The bottom line is that rehabbing, wholesaling, flipping, bird-dogging, rental properties, and in fact starting any business, IS A LOT OF WORK. If you’re not willing to work hard, then starting a business is not for you.
I am a firm believer that debt is not good and that paying cash is the way to go. How do you manage your debt ratio? Owing millions of dollars does worry me. Maybe someone could inform me on how debt can make you money?
Almost all businesses have debt. That is just part of business. The rental property business normally involves a lot of debt. In fact, if you’re starting from scratch, it will probably take about $2,000,000 in debt if you want to have a nice lifestyle from your rentals. How does debt make you money with rentals? The debt allows you to acquire enough rentals so that the cash flow will provide you a nice living. The tenants through their rent are paying down the debt and allowing you to have a monthly income and build equity. In addition, it is absolutely necessary to buy rentals at a big discount, so you pick up equity there also. Assuming you bought right, once you’ve purchased a few dozen rentals, you wake up one morning a millionaire. With even fewer rentals, the same thing will happen, but it will take longer (for the debt to be paid down). That’s how you make money and build wealth with debt.
Mike
Mike, where is it that you are putting your theories to the test and actually buying and holding rentals? I ask because it’s rare in the Northeast to locate properties at .01 rent/purchase price nevermind .02 as you suggest.
Also w/ respect to minimum cash flow/unit/month, wouldn’t that be better represented as a % than a hard number. $100/month/unit when spending $30k/unit is much nicer than when aquisition nears $100k, $200k or even $300k per unit.
Bexo,
Mike, where is it that you are putting your theories to the test and actually buying and holding rentals?
All of my rentals are right here in Ohio. I live here and run my rental property business here. I don’t have any theories that I’m testing. Everything I do is simply copying what other successful rental property owners are doing.
I ask because it's rare in the Northeast to locate properties at .01 rent/purchase price nevermind .02 as you suggest.
It doesn’t matter that it is difficult to find properties with the proper numbers. Making money with rentals is simply an exercise in math. If you pay too much for a rental, you WILL lose money each and every month. How hard or easy it is to find a property with numbers that will allow a positive cash flow is irrelevant. You either do whatever it takes or you fail. It’s just that simple.
Also w/ respect to minimum cash flow/unit/month, wouldn't that be better represented as a % than a hard number. $100/month/unit when spending $30k/unit is much nicer than when aquisition nears $100k, $200k or even $300k per unit.
It would be nice if you could insist that the cash flow would increase as the price of the rental increased. However, that’s just not reality. Unfortunately, in most cases, as the price of the rental increases, it gets more difficult to cash flow. In many of the bubble areas, it would simply be a miracle to find a high priced rental that would even cash flow $1, let alone $100. If I lived in one of those areas, I would NOT be in the rental business. Why start a business to lose money?
Good Luck,
Mike
People make money in the rental business all over the country, they just do it differently than you do. If your qualifiers (theories was perhaps the wrong word) work for you where you are that is fantastic but I ain’t moving to Ohio to start over.
If they don’t apply in a particular area of the country then it does not mean one will lose money, I can attest to that personally. Around here if you can find gross rents at .01/purchase price you better get it because somebody else will if you don’t. Also lowest cash flow/unit is $230.
You do what your market dictates and at this point I’ve learned to work smarter not harder.
You can’t get $230 a unit profit with buying at .01. If .01 is a good deal in your area than your area’s market is wrong and will likely correct itself one day soon. I buy at close to .02 in my area and will not accept much less or like propertymanager said " You will lose money each and every month".
With tenants trashing your units, evictions, repairs, etc. you simply can not make it in this business paying 1%. I wonder if you don’t completely understand all the expenses in rentals.