Which formula do you use for rentals?

Hey guys,

When you look for rental properties do you still use the 70% - repairs equation or do you go strictly by NOI?

I am finding many properties that I can get at around 80% ARV that needs light rehab (paint, flooring). I am finding it very difficult to get these at a lower price and I don’t want to compete with rehabbers on properties that need serious work.

Should I be concerned if I will only have $15k-$20k in a $130k house when I can make $200-$300/month positive cashflow?

I won’t go over 70% of the market value after rehab. In other words, my MAX offer would be 70% of market value minus repair cost.

My minimum positive cash flow is 50% of the mortgage payment using a 20 year term. I have found that anything else is not sustainable in the long term as your portfolio grows.

Good Luck,


Thanks for the reply.

I am still looking for such criteria in San Antonio but I am being out bid by other investors even though i am going with 75% and sometimes higher depending on the rental market in that area. I am trying not to become a motivated buyer and have the patience.

Talking to my lender, my lender suggested I go with ARM for 5 years then refinance to maximize the cashflow, but my concern is that in 5 years, the interest rates will be much higher. On the other hand, the market should appreciate accordingly in Texas.

5/1 arm would be a poor choice right now since you can get 30yr fixed at the same rate. also, depending on appreciation coupled with re-fi out of a problem in 5 yrs is a flawed strategy (IMHO).

second, almost all rentals needs some work. rentals are never in the condition ones finds in nice, owner-occupied house. your “80 ARV” price is probably just market pricing for average condition rentals. The very best deal I have bought never showed up on the MLS. The deal I’m closing next week, I had offer in with 2 hrs of when it hit the MLS. There was 11 other offers with 24 hrs after mine. The key was having a good pipeline and I knew the instant I saw it, it was a great deal.

you have to be cash positive. prop. mgmt has some pretty high targets that are not possible in many markets. however, you need to depend you own method of analysis/judgement. The bottomline is the same however: if you have to shovel money into it (the property) every month, it is not an investment; its a alligator and you are running a subsidized housing program. I prefer to let the US govt and other folks handle that “business”

Yes I do not intend on purchasing an alligator. I have always been a fan of the 30 year fixed but wanted to hear what you thought about it. i will go back to my previous formula and be patient

I am also in the same kind of problem with trying to get positive cash flow. I have read many posts off people that are trying to make $200 to $300 monthly positive cash flow but they never mention how much down they put in.

My last deal was 100% financed, even closing cost/inspection… so of course with all my operating expense I don’t cash flow right now but I look at it over 5 years.
Over 5 years, I average $100 per month, (not including appreciation). Of course in this strategy, if a big repair shows up the first two years, I am going to have to come out of my pocket…

Basically my point is that, yes it is better to make positive cash flow but it is getting very hard if you are doing 100% financing and buying at market price.

If you look at your Cash on Cash Return, then because I didn’t put anything when I bought and I only put $500 the first year (to cover neg cash flow) then my Cash on Cash return is probably much higher than if I had to put money down to buy and come out with positive cash flow right away.

Is my thinking wrong or some kind logical ?

Basically my point is that, yes it is better to make positive cash flow but it is getting very hard if you are doing 100% financing and buying at market price.

It doesn’t matter that it is hard to get proper cash flow. With rentals, the only thing that matters is whether you have ample positive cash flow or not. The gurus don’t tell you that because that makes REI sound like work - but it is the truth. In some markets, it may be nearly impossible to get positive cash flow. So, what is the solution - DON’T DO RENTALS!

Another truth is that merely having a typical positive cash flow is not sufficient to keep you in business long term. The reason is that the gurus don’t use all of the expenses in their cash flow formulas. When did you hear a guru say that legal fees should be included? Which guru talks about tenants trashing your property? Which gurus talk about taxes constantly increasing?

Finally, it is not sufficient to have just ANY positive cash flow. Your cash flow needs to be high enough to cover your overhead - i.e. trashed properties, regulatory changes, exterminations, major repairs, legal fees, evictions, lawsuits, lost rents due to evictions and non-paying tenants, etc, etc, etc. I have found the magic number to be a positive cash flow of AT LEAST 1/2 of the mortgage payment. Is this easy to achieve - NO! Is this necessary to stay in business long term - ABSOLUTELY!

Good Luck,



In the overall I agree with you, but again, as I mentionned earlier you are not mentionning how much down you have to put to be able to get your 50% of mortgage as positive cash flow. Needless to say that you don’t mention either your cash on cash return.
Those are the numbers I would be interested…



I haven’t put any of my own money into deals. I typically buy FAR below market value and then get financing for 70% of market value. I usually get money back at closing (although not always).

Here’s one of my typical purchases: Large SFH purchased for $30,000 (REO). Cosmetic rehab $3,500. Market value after rehab $72,000. Total borrowed $33,500 (100% of this deal) which is only 47% of market value.

Here are the monthly numbers:

Gross Rent = $675/mo.

Taxes, and Insurance = $96/mo.
Maintenance = $50/mo.
Vacancy = $33/mo.

NOI = 496/mo.

Mortgage Pmt = $261

Positive Cash Flow = $235/mo

As you can see, this one is much better than my personal minimum positive cash flow of 1/2 the mortgage payment.

This is exactly how the gurus teach you to evaluate a property. GREAT RETURN - RIGHT? WRONG!!! The guru formula leaves out that in the last two years, I’ve had to exterminate for termites once ($700). I am now evicting this tenant for non-payment. The eviction will cost about $800 (filing fees, setout, legal fees, etc) plus at least one month’s lost rent (probably 2) of $675 and any damage. (I do have an $800 deposit, so this may be tolerable). What damage will the tenants do before moving? I don’t know.

In addition to the eviction and termites, this property is held by an entity and there are annual fees associated with maintaining an entity. I have fuel expenses doing normal maintenance and picking up the rent each month. So, even this rental with excellent cash flow is still not a great deal when you consider all of the expenses in the REAL world.

In the guru fantasy world, I have a positive cash flow of $2,820 per year or $5,640 in the past two years. In the real world, my positive cash flow for the past two years is more like $3,500 (with the expenses that I’ve outlined above. If I’d only had a guru style positive cash flow of $100/month over the past two years, my Real World positive cash flow for the entire two years would have been a whopping $260 (yes, that’s $10.83 per month) .

How many rentals would I need to make a living at $10.83 per month???


<<How many rentals would I need to make a living at $10.83 per month???>>

Depends on how much you eat…and whether or not you want to live indoors…!

LOL…good points, though.


Propertymanager operate his rentals like a business. Does anyone have rentals and think less “business” and more “retirement”??? i.e., I have heard people refer to the mortgage payment for their private homes as “forced savings” does anyone take a similar approach to their “INVESTMENT” properties?

I have three properties myself, and look at them more as an additional retirement account. I’m sure for those of you who have a “traditional” retirement account know that you feed it cash for years before realizing any income.

Any thoughts???

I want to buy and hold for retirement reasons, but I am not planning on retiring in 30 years and that is why I am looking for the biggest cashflow I can get. I don’t like getting property that is not 100% financed and generates at least $300 positive cashflow, but needless to say, I cannot find any.

I would assume that PropertyManager is in an area where he can buy properties at such low price. In San Antonio REOs, HUDs, and light rehabs are going close to market value (ARV usually within 10% of market) which is not making financial sense. What also amazes me, California investors are buying everything at or close to FMV in San Antonio so somehow they are making financial sense out of it, or making big mistakes.

The principles PropertyManager has described are along the same line of what a successful local investor told me but he also made it clear, 70% of ARV will be a rehab jobs. So now I am going after rehab jobs to refinance and hold.

What also amazes me, California investors are buying everything at or close to FMV in San Antonio so somehow they are making financial sense out of it, or making big mistakes.

They are making a big mistake - it’s just that simple. Remember, the vast majority of those that start any new business don’t make it. I’m convinced that the number of new REI failures is even higher than in the general business community. Look at this forum, for instance. I’ve been on this site for the last year or so, and the turnover is dramatic. Newbies come and go, but there are only a small number of investors who have been here a while. Most newbies never buy a piece of property. Of those that do, only a VERY small percentage ever do 5 deals. Of the group that do make it to 5 deals, the vast majority are never able to go full time.

Add to that fact the number of newbies that crash and burn. Those that have a rehab go bad and those that get slaughtered as a landlord. I’ve been buying almost all of my deals lately from disgruntled landlords - there are a bunch of them.

As my mamma used to say “just because everyone else is doing it - doesn’t make it right”. Mamma was right!

I would assume that PropertyManager is in an area where he can buy properties at such low price.

If you mean that good deals are easy to find where I’m at - NO. I would estimate that no more than 1% of all the properties on the market are good investments. Again, nothing about REI is easy. I literally worked for months on some of these deals before I finally got them.

As I get farther into the REI business, I believe more strongly than ever that the promise of riches without work is simply ridiculous. REI is no different than any other business, the more you work - the more you make.

I’d love to see the numbers on a deal where someone buys a property out of state, pays to have the rehab done, pays a property manager to manage it, pays someone to maintain it, pays someone to do the evictions, etc. I can’t imagine how someone can turn a significant profit with this business model - it’s hard enough when you buy local and work like a dog!!!


Hey propertymanager, do you target specific areas to get your properties? what is your criteria besides the price? I’m asking for learning purposes :slight_smile:


Yes, I target low and lower-middle income housing close to home. Besides price, I can’t think of another criteria that I use. It’s all about the numbers.


I agree 100%. In additon to the many excellent comment sform prop. mgmt on this trhead I would also include exit strategy. Buy and hope it goes up and sell some day is not reallly a strategy. on the other hand, I’m not saying you have to pay to sell it on March 25, 2013 either. Just think about what you are trying to do. One popular strategy I use is to hold for 3-5 years and in the mean time slowly fix the place up and get the rents up. Many times pure rentals are driven by rental income and prevailing multiples of that area. I’m not a fully time investor (although I have about 30 units currently) so my operational strategy is a little diffferent that prop mgmt who is full-time and driven by day-to-day operating income. I’ll take aproperty that is a bit marginal in cash flow “out of the gate” if I can get some good upside on rents in the next 12 months. With that said, I always buy on CURRENT rents, but set clear operational plans and targets on where I want to be in 12 months.

Just to reiterate.

  1. TV apartment guru proforma sheets—bogus, way underestimate cost (no capitial reserves)
  2. Overhead cost–definately become signifcant when you get a large fleet of properties
  3. You must work hard–what your return is directly correllated to effort to in. Also, you need to constant being thinking about how to maintain properties and improve them. Renters are hard on property. While many landlords like to take the “do nothing, just collect rent to cover the mortgage”, they find out in 10 years their property is not worth nearly what 'the market rate" is becuase rents are low and tons of deferred mainteance. This is where I either buy it cheap ;D or tell them thanks, but no thanks and move on to the next deal. So the buy it and hold for 30 years is a poor strategy (IMHO); you’re probably better off to put your money in the stock market.
  4. Good deals are very hard to find. I probably buy 1 out of every 25-35 deals I look at; almost all of them never hit the MLS

I have been going after the most wanted properties/average homes and thats where I have been having hard time finding good cashflow. I started looking at a lower income, yet in good neighborhoods houses and I am noticing higher cashflow for lesser investment.
I believe I will be adjusting my strategy and looking at a different market to see how the market is there.

Why not give us the details (numbers) on one of your rental deals? Let’s see what you’re talking about!


I bought one property in the hood to get cashflow and all I got was assigned to legal duty at the county clerks office filling evictions like propertymanager seems to mention he does quite often and trash duty at the property.I will never sacrifise my pride in ownership for profit again.Although these are formulas that work I have bought my last several homes in middle to upper class neighborhoods .Yes it takes a little more patience to wait for the right one to come along.But I found that although the problems CAN be the same they rarely are.Typically when one of my tenants leaves now the have a cleaning company clean the unit.The yards are well groomed in the whole neighborhood. And the calls from the neighbors are only to tell me thanks for cleaning that place up.The upper middle class and the lower middle class REI scenerios are like night and day.And to be honest with you I love the daylight.On top of that campare the appreciation rate and days on market .JUST REMEMBER ONE GOLDEN RULE .YOU GET WHAT YOU PAY FOR.