Hi,
Whats the minimum amount of positive cash flow you would take when investing in real estate ? minimum you would take on a 2 family ? 3 family ? 4 family ? 5 and above ?
Steve,
The minimum that I will accept is $100 per month per unit, whether it is a SFH or multi. The key point is that you must use the real world expense numbers when calculating cash flow, otherwise the answer to your question is irrelevant.
Mike
Hi Mike,
Mike, dosen’t 100.00 per unit seem extremely low ? If your putting down 20% on a 4 unit property and it only has a positive cash flow of 400.00 each month, in my opnion that isn’t good. (4800.00 yearly )
If you put down lets say 20k, it would take you 5 years to get your 20k back. ( Its actually 4 but I through in vacancys, taxes, insurance etc … )
Any comments welcome …
I never put anything down. Why not post some numbers for a deal that your thinking of?
I’m not sure that you understand the math of operating rental properties. By definition, cash flow is what remains after all expenses and the mortgage are paid. You should search this site using “expenses”, “operating expenses”, “rentals”, or look back through some of my recent posts on this subject.
It is absolutely critical that you understand how to calculate cash flow before buying anything. The lack of cash flow is the number one reason that all businesses fail, including new landlords.
Mike
I never put anything down. Why not post some numbers for a deal that your thinking of?
What type of loans to you get ? 30 year ? arms ?
How come you don’t put anything down ? Aren’t the successfull landlords have little or managable debt ?
I'm not sure that you understand the math of operating rental properties. By definition, cash flow is what remains after all expenses and the mortgage are paid. You should search this site using "expenses", "operating expenses", "rentals", or look back through some of my recent posts on this subject.
I know what cash flow is but at 100.00 per unit a month, to me anyway that just dosen’t sound like a good investment ?
It is absolutely critical that you understand how to calculate cash flow before buying anything. The lack of cash flow is the number one reason that all businesses fail, including new landlords.
How do YOU calculate cash flow ?
Steve-
You’ve got to consider the area your investing in as well. $100/ month cash flow in my area would be the lowest income areas. Mid- income rentals will net you $400-600 a month cash flow per unit around here.
Putting money down is something you’ll have to consider for your own situation. I purchase and rehab all of the buildings I own in cash then refinance in a few months and get all of my money back out. There is no sense in having hundreds of thousands or millions of dollars sitting idle in a property with a sad 5-10% appreciation rate.
Where are you located ?
Steve,
I get almost all commercial loans. Normally 20 year term, 5 year arm with a 2% max adjustment and a 5% cap, and a 10 year balloon. I want to get them paid off so that I can start earning the big bucks.
I don’t put anything down because I can’t do 10 deals per year if I have to put down $20K per deal. I don’t understand your comment about the debt. If you have a positive cash flow, then the debt is being managed.
Throughout the entire United States, operating expenses fun 45% to 50% of the gross rents. Therefore 50% of the rent goes to operating expenses and 50% is left to pay the mortgage and to have some profit. So, to calculate cash flow simply subtract your mortgage payment from 1/2 of the gross rents! Anything left over is cash flow! It is just that simple.
Again, I don’t understand how you could consider a $100 cash flow per unit to be a bad investment. If you don’t have any money invested, the return on my investment is infinite!
Mike
I’m in MD.
With the exception of a few counties, most of the state has higher than national average income levels. A typical 1 or 2 bedroom apt. will go for around $1,200 (up to well over 2,000) a month. In smaller towns the rent for a 1 or 2 bedroom may run as low as $400-600.
I have a building with all 2 bedroom units. The average rent is $1350/ month. Using nice round numbers for example, 40% of the EGI are operating expenses. Assuming 100% occupancy (for example) that gives me $810 net per unit/ per month. I know the lowest DSCR for a building like this is 1.25. If I divide my net rent per unit by 1.25 DSCR that gives me $648 debt service and $162 cash flow per unit.
This was a bad example assuming 100% financing with no equity that I screwed up the calculations the first time around
Lets say gross rents for a apartment are
26,400 each year
11,400 mortgage
26,400 / 2 = 13,200 operating expenses
13,200 - 11,400 = 1,800 pos. cash flow but you wouldn’t have any positive cash flow because you would have to add in taxes, insurance, etc… or is all of this included in the yearly operating expenses ?
( These numbers are made up in my head )
Taxes and insurance for the building are considered “fixed” operating expenses- yes they are included.
All you have to do now is deduct your income taxes and you figure out how little money you really make!
Was my calculation correct ?
Yes sir.