I own one small house as a rental now and I am looking into buying another duplex or two. I plan on holding these for 20 years and then selling to help with retirement or maybe even hold them into my retirement. My question is when looking to purchase rental property is there a cash flow formula or general percent one looks at to help in making a purchase decision. I do not need cash out of these properties to live I would just like for them to pay for themselves. Or should I be looking at something totally different when contemplating a purchase? Any help is greatly appreciated.
Depends on the area, some areas have high cap rates and some have low cap rates. If you’re keeping it for a long time, of course the higher the monthly cash flow the better, but keep in mind that if you’re going to hold for 20 years, your mortage payment should stay the same, but the rent goes up over time. Who is paying the same amount for rent now as they did 10 years ago?
Just make sure you add up all your expenses, mortgage, taxes, insurance, water & sewer, maintenance etc. and factor in a 90% occupancy rate. If you get positive numbers, it’s proably a good deal. Remember at tax time you’ll also get lots of deductions so it’s possible to make money even with negative cash flow, but it can hurt on a monthly basis. Not that I recommend that at all though.
i have 1 property that has a positive cash flow of about $25 per month (but i did a refi. to eliminate debt and let the tennants build the equity back.) Although expenses can add up here and there, when it came tax time, i got about $700 more back because of the small cash flow. My other property has about a $200 positive cash flow. So between the two, i fell pretty safe for any major repairs that may come up. That would be my only concern witha small cash flow is major repairs unless you have money for this.
In our market, most investors currently just want to break even. If you can get at least a few hundred dollars in cash flow, you’re doing better than many. 80/20 helps. The investors who are doing 0-10% down will have a tougher time finding properties unless they buy off market or find a fixer-upper.
I can agree. It is very hard to find properties that are going to cashflow unless you have 10-20% down. Unless you can find a fixer upper and have little money into it. But if you do your work, you can find the deals out there but usually consists of hearing about a property or driving around lookking for them. You can usually count the MLS out unless you can throw lowball offers in and snag one.
I am in a similar position as you. I have a job that pays my bills, and am buying properties to get me to the next level. I look at each deal as if I am going to have to live on it. I, however, do have enough cash from my job that I have been putting 10% down and getting $200 to $300 per month cash flow. You have to realize that it takes just as much work to rent out a house that gives you $25/month as $200/month. If you have to go over there because your tenant’s kids and the next door neighbor’s kids are fighting, you will feel better about making that trip if the house is making you $2400/year instead of $300/year.