When It Comes to Your Rental Portfolio, How Much Cash Flow Is Enough?

When It Comes to Your Rental Portfolio, How Much Cash Flow Is Enough?

3 min read
Dave Van Horn

Dave Van Horn is a veteran real estate investor and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender.

Experience
Beginning his career in construction and as a Realtor, Dave bought his first investment property in 1989. After years of managing his own construction business, Dave became a full-time real estate investor, specializing in fix and flips, buy and holds, and eventually commercial projects, before moving into note investing in 2007.

Over the past decade, Dave has also invested his time into becoming a connector and educator, who helps others achieve success. He focuses jointly on helping accredited investors build and preserve wealth with his group Strategic Investor Alliance and with general audiences through the annual MidAtlantic Real Estate Investor Summit.

Dave has also shared his strategies and experiences with real estate and note investing via hundreds of articles published on the BiggerPockets Blog and with his acclaimed book Real Estate Note Investing.

Press
Dave has been featured on the BiggerPockets Podcast twice (shows 28 and 273), as well as episodes of familiar podcasts, including Joe Fairless’ Best Ever Show, Invest Like a Boss, Cashflow Ninja, and many others. He also has been a guest of Herb Cohen’s on Executive Leaders Radio, which airs nationwide.

Accreditations
Dave is a licensed Realtor with eXp Realty with CRS and GRI designations.

Follow
Dave’s LinkedIn
PPR on LinkedIn
PPR on Facebook
Twitter @DAVIDAVANHORN

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“Cash flow” is a term that comes up in most conversations on real estate investing—and for good reason. As a landlord, if the rent you charge is significantly higher than your expenses, that difference can not only help you build wealth but can also serve as a potential cash cushion, there to soften the blow when you have too many vacancies or when the unexpected happens and you need reserves.

And the unexpected will happen, eventually. It could be anything from an old roof needing to be replaced to termite damage or even a bridge being built over your property. (Ask me how I know.)

After 30 years of investing in real estate, I can assure you that I have no shortage of bizarre landlord stories.

In those tough situations, many real estate investors tap into whatever access to capital they have, whether it be reserves, lines of credit, or even their network of private lenders.

Even so, the conversation is mixed on how much cash flow is necessary to provide that “cushion” and how much is needed to help the investor grow his/her portfolio.

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Related: The Secret the Rich Understand About Building Wealth (And No, It’s Not All About Cash Flow)

How Much Cash Flow Is Enough?

Personally, I’ve always had the mindset that cash flow is king. When I began investing in real estate, I had a wife and two young children to support, and I was in search of more income.

Over the years, my sweet spot for minimum cash flow was about $300 to $400, but I must say that this goal hasn’t been attainable for every single property. Some properties have brought in less, while others have brought in much more.

For example, I have one property right now that cash flows $100 a month, and I hate it, but that’s just the way it shook out. I have quite a bit of equity in it, but the house isn’t worth much. The other extreme is that I have a property that cash flows $1,600 a month (never underestimate the power of improving a property for highest and best use).  

So, instead of focusing on single properties, I started to look at my real estate portfolio in its entirety, and I think this is a practice investors of all experience levels would benefit from.

What is the average cash flow? What is your average cost of capital for all your properties?

For some investors, though, increasing cash flow is less of a priority compared to some of their other investing goals.

Investing Goals & Tax Implications

Investors who are already high income earners may be looking for tax write-offs and losses to offset earned income. In other words, having more cash flow (income) may not serve you in certain phases of your life from a taxation perspective.

Maybe before you invest in your next property you should ask your accountant about how much cash flow you can add without significantly increasing your taxes.

Other investors may be more interested in long-term capital gains and appreciation. My point is that getting more cash flow isn’t the goal for all real estate investors.

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Ways to Increase Cash Flow

But if you’re like me, always looking to increase cash flow, there are a few ways to do it.

Of course, pursuing highest and best use of the property by making improvements is a common way to increase rent. But if you’re investing in higher-end properties with less room for improvement, this can be tough. After all, the more the property is worth, the more cash flow you need.

Related: The Hidden Cash Flow Killer Most Rental Owners Don’t Consider

Another strategy is classic arbitrage: tapping into your equity in the property and investing that money somewhere else, making a higher return than your interest rate.

Certainly, cash flow helped build and sustain my real estate portfolio. Looking back, though, I believe combining my emphasis on cash flow with using arbitrage and tax-saving strategies, such as taking passive losses, allowed me to build wealth even faster.

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How important is cash flow to you, and how much is “enough”? What other strategies are you using to build and preserve wealth?

Weigh in below!