Is positive cash flow possible?

Question

After you pay the 50% operating expenses and principal/interest on your mortgage debts do many of you still manage to have positive cash flow or are you all hoping the property will just appreciate?

Here is a test  formula I have read about:Rents received (Schedule E)- Rental expenses (Schedule E)- total principal and interest mortgage payments (12 x monthly payment) - total basis (cost) of all improvements and replacements added that year (Form 4562) = true cash flow

Account Closed · Answer

If the rental doesn't cash flow, then I wont touch it.  It's either cash flow or buy to flip.

Mark Forest · Answer

Thanks for your input Mike.  His property management book also has a few involved formulae in them.  My problem is lack of experience to put what I read into action.  I am glad to hear that real world landlords do achieve results.

I can not do it with my one rental home, but now that it is warmer we are getting more interest.  I hope to get a tenant soon.

Michael Rossi · Answer

Yes,  I have positive cash flow!  You wouldn't buy a rental to LOSE money - would you?

That's interesting!  I'm in the cash flow business.  I consider equity and appreciation to be the icing on the cake!  You can't eat equity, but you can eat with cash!

Mike

Will Barnard · Answer

All this talk about eating is making me hungry. Time for a trip down the street to In and Out Burger! :lol:

Mark Forest · Answer

Mike OH I am glad to hear from you, and I have been enjoying your blog.

I am asking about this because I read about negative cash flow for rental properties in John Reedâ€™s site at http://www.johntreed.com/positive.html  Reed is not very popular here so I did not want to unduly influence the forum.

His article on this issue is interesting.

Michael Rossi · Answer

Reed is basically right in what he says, particularly about the gurus!   He is also right about the operating expenses.  I believe that he is using 45% instead of the 50% I use, because he's not counting capital expenses.  In other words, he's using the 50% rule, he's just adding it up differently than I do.

I would disagree with is his assertion that  "owning rental property almost invariably has the exact opposite effect on your cash flow. It takes your current annual cash flow and confiscates part of it to feed the rental property."  Obviously, you CAN receive significant positive cash flow from rentals if you do the work to find great deals.

I also think that he makes things WAY TOO COMPLICATED by talking about Cap Rate and Annual Loan Constant!  UGH - that's making my brain hurt.  Rental properties just aren't that difficult or complicated.

Other than those things, I do agree with the majority of what Reed says.

Mike

Mark Forest · Answer

Thanks to all who answered.  I imagine that any landlord not enjoying positive cash flow would not last too long.  Do the rest of your reading this also have positive cash flow?

Michael Shadow · Answer

Good cash flow is needed if you hope to continue growing your RE empire.  If you always calculate for positive cash flow you can buy just about as many properties as you feel comfortable.  If you buy properties with a negative cash flow then you can only buy as many properties as your finances can support.  Then if you run into problems with your job or medical issues or some other unforeseen circumstance your REI will come to a halt.

-Michael

Harrison Painter · Answer

I would like to think I am in the Equity Business. Cash Flow is just the icing on the cake.

- Harrison

Eric Wang · Answer

"Your in the cash flow business, not appreciation business.  Appreciation doesn't pay the bills.  Cash flow does."  In the past, I calculated appreciation into the equation because that what I was taught in class and by other agents, thanks to the people on BiggerPockets, they set me straight.