What target cash flow % should I go for on the first one?

9 Replies

Hi BPers -- I have a Friday question for you!

So, right, I have been hanging around here for a little more than a year now, on and off, getting my head straight on what we want for a rental property.

I am still working to establish criteria and firm up the vision.

Here is where I am at:

1.  We want a property that is close to home.  We will self-manage and I want to learn the business and management side. 

2.  We want a property that won't cost too much to get into.  However, we will likely want regular bank financing for the first one.  So target price range is $50,000 - $100,000 and our down payment / initial out of pocket costs would be $15,000 - $30,000 to get a first property.

3.  Property quality and neighborhood quality matters.  When I buy stocks, I am looking for appreciation and cash flow (I want and buy stocks / businesses that are basically solid, steady, reliable,  cash machines over the long haul. Many stocks throw off dividends and appreciate.)  I want basically the same from rentals.  They have to hold their value.  The neighborhoods have to be attractive long-term.  The homes need to be good homes.  Appreciation can be slow and steady, that is fine.  

So here is the question -- how much cash flow should I target for a first property?  Will I be successful if I get 1.5%?   Will that be pretty much a "sure thing"?   2% is a sure thing, yes?  I remember Brandon saying on a podcast that 1% is the bare minimum.  Do you agree with that?  

Where is your balance between cash flow and appreciation?   Do you calculate solely on cash flow?  

I am in the position where I need the first property to WORK.  It is important to be careful. If you were me, what cash flow percent would you look for?

Am I looking at the wrong metric?  

Right now, I am taking more time to brush up  and organize / automate our personal finances and build more cash cushion / safety net.  I love stock investing and that is still my first focus, but we will diversify into a rental.  I have paused looking at homes on Zillow until I get my financial goals super-clear.  Then I will try to get the neighborhood super-clear.

Thank you for any advice!

What do you feel good with? On my first property we aimed for 20% so far I'm seeing about a 27-30% ROI.

1.5% of what?  Cash Flow?  Purchase price?

I don't look at a % of anything.  I look at a hard number.  If I don't get at least $300/month CF...with a PM and financing in place, I'm looking at the wrong house.

Joe Villeneuve

I look for cap rates of at least 8%.  Any appreciation is extra.  I buy most we cash but if I am using financing my cap rate must be at least 3 percentage points above my cost of money.

Hope that helps.

Bill

I agree with @Joe Villeneuve  and @Bill Jacobsen  .  You shouldn't look at cashflow %.  The problem with using a % on that is if you buy a lower priced home, that % you used may be too small to cover if something goes wrong.  So a hard number of $300 like Bill mentioned is a more comfortable way to look at the numbers.  Make sure you don't forget to include all possible monthly and annual expenses in calculating your cashflow.  

Good luck on your search!

Kyle

Originally posted by @Karen M. :

Hi BPers -- I have a Friday question for you!

 

Am I looking at the wrong metric?  

Thank you for any advice!

You are looking at the wrong metric.  Try this..

http://www.mortgage-investments.com/resources/ Use the ten year analysis. First you have to KNOW what your market ratios are. Comparing to Indiana or Detroit means nothing. Realize that people that insist on cash flow now are probably giving up LOTS of appreciation. Don't let anyone try to fool you with a cap rate. That is market based and if someone can't show you the details of a NOI to get a cap rate they don't know what they are talking about or are just trying to bamboozle you.

Once you know REAL "your market" numbers nothing wrong with trying to do better than market. 

I just learned a real great point from another investor on BP. He told me that these rules are just guidelines. He typically invests based on a given number of net income he will receive from the property. For instance if he makes $300 positive cash flow off each property he is happy. The numbers will be higher the closer you get to 2% but some may be happy with even the minimum of 1% as long as they make that magical number that makes them happy. I'm not experienced but thought I would share what an experienced investor told me. Hope this helps

This post has been removed.

@Karen M.  it sounds like you're on the right track by "hanging" out on BP!

The 2% rule is hard to find with "good" properties.  Usually the higher the return, the higher the risk.  Yes, you can find a property that meets the 2% rule but it will usually not really cash flow that well.  For example, when I first got started, I was really drawn into the "sexy" thought of buying a home for $25k [all-in] and renting for $500+.  At one point, I had over 22 doors like this.  After six months I quickly realized this wasn't what I thought it would be and was going to be as fun as I had imagined.

Fast forward a few years and now I only own properties that are built after 1945 & rent for $700 or more.

I now shoot for $200 net after all expenses and debt service.

I also own all of my properties with zero money invested.  I use my own cash or that of a private lender to buy the as-is property and then fix up.  Once it shows well, I go to a local credit union or State Bank and get it refinanced for 75% of the now appraised value - which covers all my principle and covers the profit I pay the private lender.  Then rinse and repeat.

IF you're going to self manage, I suggest getting Mike Butlers "Landlording on Autopilot".  It has a ton of great info and will save you a lot of headaches.

IMHO - I would not self manage and hire a good PM.  Even when I just had the one property, I had a PM.  I know there are good arguments for this here on BP.  For me, it's about the price of time [which is priceless].  I will gladly pay someone $70 to handle the month to month issues that pop up with a unit while I spend that hour I save [or sometimes several hours more] each month doing something with my family or doing the next deal.

With all that said, you mentioned you've been thinking about this for over a year now [probably longer].  My biggest mistake was to wait too long to buy that first one.  I waited over 2 years and now kick myself for waiting so long!  I challenge you to get off the fence and buy something..NOW!  Otherwise, you will never find the "perfect" deal.  Just get one under your belt and you will learn a ton.  Even if it sucks [and some will] you are at least moving forward and getting your education out of the way.

So many people tell me that "one of these days I'll get into REI". Heck, "one of these days" was 2 years ago!

I hope that helps a little and good luck!

Would you mind sharing what the numbers look like on one of these properties?

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here