CASH FLOW

Real Estate Investor · Glendale, AZ · Member since 2014 · 17 posts · 3 votes

I know cash is KING but I was hoping from some clarification in the whole aspect of not flipping but buying property and renting it out. I keep hearing this 50% rule and what not, but just want to see if anyone has any insight on what is maybe a "standard among cash flow on properties? Any info would be grateful I have a number in mind already just want to see what other investors feel.

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J ScottPro Member

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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

12y

You're basically asking what level of return you should target on your investments. That's going to be a highly personal decision based on your situation and your goals.

That said, I'll give you an example of how I might look at this (somewhat made up, but perfectly reasonable)...

- In 15 years, when my kids are grown and out of the house, I'd like to have 5 times as much money as I do today.

- In order to have 5 times as much money in 15 years as I do today, I'd need my money to grow at about 12% per year.

- Based on that, I would want to have all my money working (invested) at all times and I would want every investment to generate at least 12% returns.

- Unfortunately, it's nearly impossible to have all your money invested at all times (you can't always find investments and sometimes there is time between investments), so to be safe, I'd probably target 15% returns on my investments.

- If I own a rental that's generating $100/month, that's $1200/year.

- So, the question becomes, what is the most amount of money I could have invested where a 15% return would be $1200?

- Simple formula for that: X * 15% = $1200. Solve the equation, and X = $8000.

- So, the most I could spend on that property would be $8000. Seems crazy...you can't buy a property for $8000! But, remember, if I'm only getting $100/month, that's probably because I have a mortgage. Let's say I have a typical mortgage where I put down 20%, and that 20% was $8000, then the purchase price is probably somewhere around $40,000.

So, for my purposes, I would likely want to pay no more than $40K for a typical property.

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Casey Cuppy
Real Estate Agent · Phoenix, AZ · Member since 2014 · 81 posts · 25 votes
12y
When I get my investors properties we always look for the cap rate (Annual cash flow/ sales price) to be above 6% at the minimum. Obviously we want properties around 8-10% but over 6% is a good return. (Especially when you add in appreciation) One thing to be careful of is making sure you are getting real numbers. When I say annual cash flow I am referring to actually annual cash flow, so how much you are taking in each year after all expenses and accounting for a vacancy rate. You will get a lot of people who will give you the cap rate but not take out anything for management fee, maintenance, taxes, etc.
That is a formula that has worked very well for me.
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Simon Campbell
Miami, FL · Member since 2012 · 612 posts · 189 votes
12y
I use the 50% rule when initially analyzing a property's profitability. If it cannot meet that then I move on. If it passes, then I work to verify all actual expenses to see if the actual return will be higher or lower.
Generally experienced investors shoot for a minimum return of $100 per door/per month. That is $100 cash in your pocket every month after paying all expenses and the mortgage.
6 Reply
Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
I estimate cash flow using the 50% rule (assuming a PM) and my expected mortgage payment. Then I divide by the total cash required to close the deal. I shoot for a minimum of 10% cash on cash return.
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Phillip Gonzales
OP
Real Estate Investor · Glendale, AZ · Member since 2014 · 17 posts · 3 votes
12y
Thank you for the responses I keep hearing this 50% rule and now its starting to make more sense
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Alejandro Saenz
Investor · Lake Mary, FL · Member since 2013 · 18 posts · 9 votes
12y
Also from my experience you will find that nicer areas with higher property appreciation will have less cashflow. And viceversa, worse areas with no appreciation will have the higher cashflows.
1 Reply
Phillip Gonzales
OP
Real Estate Investor · Glendale, AZ · Member since 2014 · 17 posts · 3 votes
12y
Interesting you say that @alejando saenz I just about to ask that question
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Simon Campbell
Miami, FL · Member since 2012 · 612 posts · 189 votes
12y
The reason behind this is risk requires higher returns. Just like riskier stocks have a higher return, so do riskier investments (or at least they should). Often properties in a "worse" area has a greater degree of tenant turn-over and often more repairs at that time. But the purchase prices are lower and thus the potential for a higher return.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
A common misconception. Higher risk investments often offer the possibility of higher returns than lower risk investments. Higher risk investments also carry the possibility of lower returns than low risk investments, or even losses.
In investing, "risk" is quantified by looking at the range of possible returns. A large range of possible returns means the investment is high risk. Rentals fall into that category, as does pretty much every other aspect of real estate. Some will win, some will lose (Some were born to sing the blues, sorry, just say Journey last night.) A small range of returns means the investment is low risk.
In most markets there's a sweet spot if you're investing for cash flow. Not the warzones or areas where you will have a lot of turnover or low demand. But also not the "nice" areas where houses are expensive compared to rents.
Appreciation is just a guess. Lots of folks bought in 2004-2007 expecting to double their money in a few years. We know how that worked out. Conversely, I wouldn't have expected the run-up we've seen around here in prices over the last few years.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Alejandro Saenz:
Also from my experience you will find that nicer areas with higher property appreciation will have less cashflow.
How do you determine what average appreciation for an area will be over 5+ years?
I've never seen an accurate predictor of this metric on a local basis, and personally don't believe one exists.
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Peter MckernanBusiness Member
Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
12y
@Simon Campbell
Put the perspective of cash flow in the best terms when he talked about making sure that you have covered the 50% rule, or move on. He also talked about making sure that you shoot for $100 a door or more! Sound advice.
Returns can also be talked about by the 2% rule; however, in a lot of areas there really isn't a possibility to get that type of return. I currently don't look for that, so I would say that the 50% rule (that's what I use) is a safer bet in real estate buy and holds.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Peter Mckernan:
He also talked about making sure that you shoot for $100 a door or more! Sound advice.
Actually, that's meaningless advice (in my opinion)...
Let's say you're getting $200/door (twice the recommendation!) but you came out of pocket $100K/door on the purchase.
Is that a good deal?
Considering that you could make more money risk-free (and work-free) in a CD, I don't think so.
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Simon Campbell
Miami, FL · Member since 2012 · 612 posts · 189 votes
12y
Originally posted by @J Scott:

Is that a good deal?
Considering that you could make more money risk-free (and work-free) in a CD, I don't think so.
Making a purchase decision on solely on $100/door is ludicrous. It is one identifier in the process for deciding if an investment property if viable. Investment decisions have to be weighed against other investment options both within the realm of real estate and outside (CDs, stock returns etc) and the viability of the income stream.
I have seen many a new investor say that the property meets the 50% rule and even the 2% rule but when you factor in the mortgage payment, they have a negative cash flow. All of a sudden their qualifying investment opportunity doesn't look so hot.
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Mike Moles
Investor · Bethel, CT · Member since 2014 · 55 posts · 12 votes
12y
So $100 per door cash flow (passing the 50% rule test) with a CoC return of more than a like risk investment is a good deal, and a like risk investment means an option that has similar return on investment volatility.
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Scott W.
Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
12y
with so many homeowners turned landlords, i would say a ton of these people are negative cash flow.

but with the recent run up in values, they are banking a lot of $, especially if they qualfied to buy a house during the downturn and rent out their former primary residence.
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Timothy Riley
Investor · Chicago, IL · Member since 2013 · 451 posts · 96 votes
12y
LOL Now I need help?
Thanks @Phillip Gonzales for this questioning.
When I look at $100 a door - I look at it as being the profit after everything has been included. @J Scott and @Simon Campbell Am I looking at it wrong? It sounds as though you are saying that isn't ok regardless of the price and that everything is covered?
I'm a cash purchaser so I'm actually looking at $600+ a door but am planning on moving up the scale on property types that a mortgage will be needed, and am trying to get a grasp on the best way to look at this.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Timothy Riley:
When I look at $100 a door - I look at it as being the profit after everything has been included. @J Scott and @Simon Campbell Am I looking at it wrong? It sounds as though you are saying that isn't ok regardless of the price and that everything is covered?
What Simon and I are saying is that $100/door doesn't give you enough information.
Here are two situations:
1. You give me $100 today and I give you $100 every month for the rest of your life.
2. You give me $1,000,000 today and I give you $100 every month for the rest of your life.
Do both of those deals sound good to you?
Those are (loosely) analogous to buying two properties at different prices ($100 and $1M) and both generating $100/month in cash flow. If getting $100/month in cash flow was a good investment all by itself, then you'd think both those investments above would be good. But, clearly #2 isn't very good, right?
What makes #2 a bad investment?
It's the fact that the $100/month is so small compared to the initial investment that there are endless other investments that could generate better returns. You could put $1M in a savings account and earn more!
So, when analyzing an investment, you need to know more than just how much you're making per door per month before you know if it's a good deal.
Does that make sense?
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Timothy Riley
Investor · Chicago, IL · Member since 2013 · 451 posts · 96 votes
12y
@J Scott By George I think I got it. :) A World of a difference - Thanks!!!
Hypothetically - You are a hold n rent investor making a purchase on a per door profit basis.
What would be the max price including purchase and rehab that you would spend and receive $100 per door (no appreciation you'll sell this place after 20+ yrs. at the same purchase price)?
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
You're basically asking what level of return you should target on your investments. That's going to be a highly personal decision based on your situation and your goals.
That said, I'll give you an example of how I might look at this (somewhat made up, but perfectly reasonable)...
- In 15 years, when my kids are grown and out of the house, I'd like to have 5 times as much money as I do today.
- In order to have 5 times as much money in 15 years as I do today, I'd need my money to grow at about 12% per year.
- Based on that, I would want to have all my money working (invested) at all times and I would want every investment to generate at least 12% returns.
- Unfortunately, it's nearly impossible to have all your money invested at all times (you can't always find investments and sometimes there is time between investments), so to be safe, I'd probably target 15% returns on my investments.
- If I own a rental that's generating $100/month, that's $1200/year.
- So, the question becomes, what is the most amount of money I could have invested where a 15% return would be $1200?
- Simple formula for that: X * 15% = $1200. Solve the equation, and X = $8000.
- So, the most I could spend on that property would be $8000. Seems crazy...you can't buy a property for $8000! But, remember, if I'm only getting $100/month, that's probably because I have a mortgage. Let's say I have a typical mortgage where I put down 20%, and that 20% was $8000, then the purchase price is probably somewhere around $40,000.
So, for my purposes, I would likely want to pay no more than $40K for a typical property.
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Brandon Luke
Real Estate Investor · Yakima, WA · Member since 2014 · 79 posts · 25 votes
12y
This is probably a dumb question...but I'm a dumb guy! Lol! In shooting for $100/door, what doors are you counting? Interior/exterior? Just main entrance? $100/door is a completely new concept for me.
0 Reply
Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
Originally posted by @Brandon Luke:

This is probably a dumb question...but I'm a dumb guy! Lol! In shooting for $100/door, what doors are you counting? Interior/exterior? Just main entrance?
$100/door is a completely new concept for me.
When they say "$100/door" they are speaking of "units". So a duplex is two "doors", a single family house is one "door" an apartment complex is however many individual "doors" (10, 20, 50, 100).
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Matt Devincenzo:

When they say "$100/door" they are speaking of "units". So a duplex is two "doors", a single family house is one "door" an apartment complex is however many individual "doors" (10, 20, 50, 100).
So it's $100 per FRONT DOOR... :-)
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Brandon SturgillBusiness Member
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
12y
Good discussion. Nothing like free education...is the time correct on these posts...J are you really up at 3:40 in the morning? This must be mountain time or something...; )
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Brandon Sturgill:
Good discussion. Nothing like free education...is the time correct on these posts...J are you really up at 3:40 in the morning? This must be mountain time or something...; )
Wrote that at 6:40am...so it's off by 3 hours... :)
My guess is it's all Pacific time (I'm EST)...
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Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
12y
It means main door to the house/apt or whatever. A single family residence would have one door. A triplex-three doors. A 100 unit apartment building would have 100 doors.
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Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
12y
Times are PDT.
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