What is acceptible cash flow to you? I realize it’s different for each investor. Is $300/mo a good starting point? I don’t know if I asked the question correctly so fill me in on the details.
$300 a month is excellent. Just make sure you have taken all your expenses into consideration, i.e., maintenance and repairs, property taxes and insurance, vacancies, etc.
Yes, cash flow= money in my pocket after all the expenses.
What is the minimum cash flow you would take?
I try not to go below $300
I think a lot of it depends on how much you put down. I would not take $300/month cash flow if I had to put $200K into a deal. I would however take $300/month if I could put $20K down. I think you should look at it more as a % of down payment basis.
My absolute bottomline that I will even consider is $125 a month ($1500 a year) but the house are cheaper here…all of the ones that I actually own are much higher.
Keith
Rule of thumb has always been $100 per unit, so if you have a 4plex that is $400 a month. But that figure has been used since the early 80’s when Carlton Sheets started pitching his informericals… Today many people still look for the same range of 100-150 month…But remember, you need to still make enough a month to cover vacancies, so add in about 10-15% in added expenses for vacancy reserves.
I was thinkg though for example in my case here in florida .I have 2 properties that when i got them there was only about $150 a month cashflow each it was a package deal for 2 duplexes. and our appreciation rate at the time was 23% .though I knew this would not last forever I thought if I could at least get an average of 12% the next three years my rents will come up and help cashflow and I have good equity. this was working just as planned but a year and a 1/2 into this thought Hurricane wilma came along and messed things up. I was able to repair the property and did get ass. from the ins. co. but my taxes and ins. went up so much they are now break even at best.But they are very low manit and we are still appreciating at a good clip.I really dont want to sell as I see a future for theese lovely homes. What do you think? :-\
I live in Fl and know its hard to cashflow in many areas like S.FL and mainly it is because of taxes and insurance where its getting out of control. But if your house is still appreciating you want to keep it for awhile. Remember you have appreciating assets and cashflow assets.
For example: if you bought a preconstruction SFH in cape coral, chances are you would never cashflow the property, maybe breakeven if your lucky but the appreciation is more than worth it. maybe it is time to see how much equity you have and decide if you want to sell it, maybe carrying a sizeable second for added cashflow or you can refi if you have alot of equity using an option arm if your interested in holding the property for 3-5more yrs that way you will increase your cashflow. But only use the option arm if you have 25+% in equity now since you will be in a negative amortization loan.
In my opinion, you can not pick a random number as an acceptable cash flow level. While $300 per month would probably be an good cash flow on a $40,000 house, it would be TERRIBLE on a $500,000 house. You need to consider how your cash flow will be affected by vacancies, major improvements, destruction by tenants, lawsuits, etc. Operating rentals is a business and is not as simple as taking the gross rent minus normal expenses and assuming that you will have a profit just because your cash flow looks positive.
Here are a couple of examples:
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You have 10 houses each with a positive cash flow of $200 per month. The mortgage on each house is $400 per month. Therefore, your total positive cash flow is $2,000 per month and your total mortgage payment is $4,000 each month. If two of these houses becomes vacant, then you lose the positive cash flow from two of the houses while still paying the mortgage payments on those houses. In this situation, you’ve lose $400 in cash flow per month from the two vacant houses and you have also lost an additional $800 in mortgage payments that are not being paid by the tenants. Therefore, with only two vacancies, you’ve lost $1,200 of your $2,000 positive cash flow for the 10 houses.
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You have 10 houses each with a positive cash flow of $200 per month. The mortgage on each house is $800 per month. Therefore, your total positive cash flow is $2,000 per month and your total mortgage payment is $8,000 each month. If two of these houses becomes vacant, then you lose the positive cash flow from two of the houses while still paying the mortgage payments on those houses. In this situation, you’ve lose $400 in cash flow per month from the two vacant houses and you have also lost an additional $1,600 in mortgage payments that are not being paid by the tenants. Therefore, with only two vacancies, you’ve lost $2,000 of your $2,000 positive cash flow for the 10 houses. ALL OF YOUR PROFIT IS GONE!
So, while a $200 positive cash flow with a $400 mortgage will still provide a positive cash flow with a 20% vacancy rate, the same is not true of a $200 positive cash flow with an $800 mortgage.
The results are even more dramatic with a 30% vacancy rate.
Therefore, I base my minimum cash flow per property on a percentage of the mortgage payment. I will accept a positive cash flow of no less than 1/3 of the mortgage payment for rental properties. This is my absolute minimum and I usually only buy properties with a cash flow of 1/2 of the mortgage payment. This ratio of cash flow to mortgage payment not only protects you from vacancies but also from other unexpected expenses such as large repairs, tenants destroying a unit, lawsuits, evictions, etc. These are all things that do occur when you are running a rental business. They must be taken into account if you are to survive long-term.
Good Luck,
Mike
The reason so many people have trouble with cash flow is they have not been taught how to efficiently manage the asset (property) once they have acquired it.
You rent out the use and occupancy of the property for usually less than the combined total of your mortgage payment, property taxes, maintenance and repairs, management costs and allowance for vacancies. The tenant has little incentive and feels like he/she is just making the landlord rich. No incentive = problems.
My tenants agree to pay MUCH higher than normal rent AND to be completely responsible for maintenance and repairs on a three-year lease. My tenants, in addition to just the use and occupancy of the property, acquire immediate home ownership benefits and the IRS allows them to write off the monthly mortgage interest payments as well as property taxes and expenses. They also share in future appreciation and mortgage reduction. We become partners – not landlord, tenant.
Happy tenants make happy landlords, and ALWAYS with a positive cash flow.
I have zero responsibility for mortgage payments, property taxes, maintenance and repairs, management costs, etc. I am protected from creditor judgments, lawsuits, bankruptcies, marital blowups, etc. I just collect my monthly POSITIVE cash flow check. Equity makes no difference.
Always try to structure your deals as a WIN/WIN situation for you and the Seller when you acquire property, and for you and your Tenant once you manage it.
As Spock would say: “Live Long and Prosper”.
Excellent help gentlemen( and women?),
My glass is always 1/2 full so I try to look at things from an "It will work or I will make it work " perspective.and that has carried me to where Im at which is a place in life (cliche’ coming up) I never thought I would ever be.IM not sure what city your buying 1/2 the mortgage to rent properties but Ive literally scoured the country flying from here to there and for someone trying to use that method only it would take a life time to collect 10 in one city.I sure hope Im wrong and have looked in the wrong places.so if you would like to throw some city names out I would love to take a look.mtnwizard Im just starting to look into the lease option deals .here in florida it doesnt really work for common practice cause everybody thinks everybody else is out to take them for broke. like you said it is a partnership and well thath just doenst work for common practice here.YES there are those contracts going on here but like I say its rare.Thats why Im lloking to towns outside here I have great equity and am itching to start building my portfolio again look at my post in the "My realestate investing career has begun"post. thanks for the help will be checking back
campbellgroup where in Fl are you located. I am in ft lauderdale. i agree cashflow in Fl, especially in SFL is a rare comodity unless your putting down 30-40% of the purchase price or get lucky… You can always go with option arms and use the min. payment to increase (give yourself) cashflow but you risk losing your equity in the home, still many people do it.
I have found you can cashflow properties in Ft Pierce area as properties are cheap along with rents but many times it works out right…
Yeah I noticed that St Lucie county is a good place for some cash flow but I find that unless you are in the getto , and I mean the getto the homes in the " Progresso / Lauderhill" type neighborhoods are not making it for cashflow either so thats why Im looking towars the mid west where homes are cheap cash flow is good and the towns hoods are our uppermiddle class neighborhoods.
You can buy properties that will cash flow properly nearly everywhere in the US except the coastal states. The point is that it doesn’t matter what the reasons are, if you don’t have adequate cash flow to operate your rental business (or any other business), you will eventually go out of business. Counting on appreciation is risky with rentals, because sooner or later the appreciation will stop. Real estate goes in cycles. A city or area that is in a boom today WILL be in a bust tomorrow. If you’re counting on appreciation with an income property when the market turns, you’re out of business!
So, while it’s nice to always see the glass as 1/2 full, that is irrelevant to the business. The “Numbers” are what really matters. You either have a cash flow that will sustain the business or you don’t - it’s just that simple.
Good Luck,
Mike
You can also find cashflowing homes in Doresy park area and neighbhorhoods between I-95 and NW 31Ave… The SFH homes, then from About 19th St. to 6th St. IN that range you can still find SFH’s in the 100-150K range and make excellent sec8 rentals… This is probably one of the few areas where there is very little appreciation.
like you said property manager, the areas go in cycles. so if you are in a really good appreciating area and you can hold on through teh bust as history repeats itsself you will come out stronger in the end.
like you said property manager, the areas go in cycles. so if you are in a really good appreciating area and you can hold on through teh bust as history repeats itsself you will come out stronger in the end.
Not exactly. Buying during the boom and holding on through the bust simply means that you throw away your profit on the way down. The smart money will sell near the top, pocket the profits, and then not buy again until the next up cycle (or only buy at a deep discount). In the mean time, they’ll adopt another strategy that works in a down market. In my opinion, betting on appreciation is a very risky game that normally ends in failure. In addition, it is totally un-necessary when there are strategies that will virtually guarantee a profit without the need to gamble on something over which you have no control.
Good Luck,
Mike
I bought a condo once here in Austin for $16,000. It is a 1 bedroom and rents for $425. It is worth $30,000 today. Even at $16,000 I did not break even. I would still buy a 1000 at $16,000 but not at $30,000.
Thank you,
Ted P. Stokely Jr
I found this in the archives.Is this ludacris or am I missing something.Seems to be in line with my thinking.
The purpose of an investment is to make money. If you buy a rental property that has a negative cash flow, you are losing money every month. How many of these “investments” can you afford? I don’t understand this way of thinking. If you’re going to buy an income generating property, then why not actually buy one that generates income?
Mike