On the subject of cash flow and self-sustaining properties...

38 Replies

Recently, I've been experiencing some confusion as it relates to cash flow, expenses, and the concept of self-sustaining properties.

At some indeterminate point in the future, I want to have replaced my monthly w2 income with that of rental property income. Simultaneously, I don't want to have to worry about working a second job (such as wholesaling) to replenish my cash reserves as I use them over the months/years to pay for capital expenditures and other expenses.

So, first of all, how should I approach this when analyzing properties? Do I essentially need to depreciate the CapEx items for each property I analyzed and figure out how much I will need on a monthly basis to allow the property to sustain itself?

When I ask local investors about expenses, I get mixed responses. One guy, who has about 16-17 rental properties over the course of the past few years, said that if you're getting $200 above the principal and interest, you're doing well. He said he takes out about 10% for vacancy and 10% for repairs/CapEx (20% variable expenses total) -- he seems to be ignoring property management as well as being too low on repairs/CapEx. If he's going to combine them, I'd think he'd want that number to be at least 15%.

Anyways, I'm just trying to figure out exactly how to go about analyzing properties so that I purchased properties which can truly be self-sustaining with regards to all expenses, while providing $150 - $200 in cash flow on top of that. Hypothetically speaking, I'd like to have 30 properties that can sustain themselves without needing to ever contribute any additional money to help pay for expenses. Is this viable? And if so, how do I prepare for this?

You're on the right track.  Check out BP's deal analyzer and it may confirm some of your thoughts.  Many BP members are not a fan of using percentages as the percentage will vary by property and by rental amount (x% of $750 in rent is obviously not the same as x% of $2000 in rent).  Some BP members schedule out the property components, their estimated remaining lives, and their estimated future replacement costs.

Nice work on properly thinking through cap ex.  Some investors go many years without properly factoring them in and learn the hard way that their portfolio is not as profitable as they thought.

@Mike Dymski - Thanks. I'm starting to wonder if my local area isn't actually that great for buy and hold with respect to long-term performance and self-sustainability of properties.

@Account Closed - A couple questions:

1. Can you explain the "subject to" part? Is this where I take over the mortgage and make their payments? How does this work?

2. When you say sell to tenant buyers, are you talking about lease option? I know a local investor who does this - a 2-year lease option which means he gets a down payment up front (although we don't call it that), and isn't responsible for repairs. Sounds nice, except..

3. What if the tenant decided to not repair the roof/HVAC/etc? Also, I know that the majority of lease options don't end in sale, but let's assume they did. How do I break the cycle of having to continually find new properties so I can rest on my laurels at some point and let the properties take care of themselves, financially speaking?

Originally posted by @Lucas Mills :

@Mike Dymski - Thanks. I'm starting to wonder if my local area isn't actually that great for buy and hold with respect to long-term performance and self-sustainability of properties.

@Ken Min - A couple questions:

1. Can you explain the "subject to" part? Is this where I take over the mortgage and make their payments? How does this work?

2. When you say sell to tenant buyers, are you talking about lease option? I know a local investor who does this - a 2-year lease option which means he gets a down payment up front (although we don't call it that), and isn't responsible for repairs. Sounds nice, except..

3. What if the tenant decided to not repair the roof/HVAC/etc? Also, I know that the majority of lease options don't end in sale, but let's assume they did. How do I break the cycle of having to continually find new properties so I can rest on my laurels at some point and let the properties take care of themselves, financially speaking?

Those are all good questions. I've posted previously on how Subject To works and it should be rewarding to do a Search at BP for "Subject To." or you can send me a colleague request and I'll answer it for you. It is kind of lengthy.

Selling to Tenant Buyers can be a Lease Option that can be 10 years if you want, or longer (Except in Texas). The amount "down" is called an Option Fee, and you can also sell using a Wrap or Land Contract etc. Make the Lease Option as long as the Tenant Buyer wants and extend when requested. I always assume a percentage will not exercise their Option and then I sell the property again and get another Option Fee. When someone does refinance, I get the "back end" of equity that is sitting there. There are so many benefits I stopped doing Fix & Flips and Buy & Holds.

Here is a link to one of the explanations:

https://www.biggerpockets.com/forums/311/topics/47...

@Account Closed

Thank you very much sir. I will do my own searching first then I may reach out for clarification if necessary.

Yes, the lease option (as opposed to just a buy and hold) sound like it has many advantages. I am wondering if I would have to continually be looking for new properties (assuming some of mine will sell), and how to eventually break out of that cycle or transition into something else. I.e., what would be a natural progression from this model.

I would like to be at the point where I am "financially free" and not needing to seek out additional properties within the next 5-7 years. That's not to say that I would quit altogether by any means. I just want my investments to reflect that goal so that it can be realized if desired. Doing a bunch of lease options sounds great for many reasons, but it also sounds a bit less "long-term", if we assume that at least some of them will sell. I don't really want to have to worry about that after 5-7 years or so.

Perhaps my question will be answered as I look into this more. Any more insight you have to offer is greatly appreciated! Thanks again for the help.

@Lucas Mills
So I think what you're saying by "self sustaining" you mean a property that you have to invest the initial down payment/ closing costs and then don't have to dump any more money into it after that.

I think it's definitely possible, but probably not on every property. I think you do your best to project out returns on each property and this gives you the best CHANCE that it will cash flow but at the end of the day some properties will just be losers. They just won't perform to your projections. You just want your winners to more than compensate for your losers.

Others will debate this, but I analyze a typical property as follows:

Vacancy 7%-10%
Insurance (specific to property type and location)
Maintenance 10%-15% - yes I lump all repairs and cap ex in one bucket. I either buy properties with brand new mechanicals and roofs or done a rehab to put in new mechanicals. Plus I plan on shorter term holds...not planning on holding for 30 years, probably more like 7-10 years.
Taxes (specific to that property of course)
Management - always account for this even if you are self managing. Your time is totally worth something isn't it?! I usually add a factor for lease up fees as well. For example if a PM charges 7% plus a 1 months rent for lease up, then I bump it up to 10%.

After all of these operating expenses, subtract out principal and interest, and you have your net cash flow. This number should be $150-300 for a single family, IMO.

At the end of the day this is just a projection, but at least it gets you in the ball park, and like I said above, gives you a reasonable chance to be cash flow positive. Out of my 6 properties, 4 are at or above projections, 1 is below but still cash flow positive, and 1 is a loser. But it's a loser because of a freak flood...which you can't really plan for in projections. This is one of the reasons you should always keep a healthy amount of cash reserves.

Hope this answers some of your questions!

Hi @Lucas Mills ,

Very high income people have the luxury of buying properties that might be "meh" for others. 

For them, way up in the top marginal tax brackets, the mortgage interest and property tax deductions can put a cashflow negative property solidly in the black. That's a luxury they have, thanks to their hard work at their day-jobs putting them in that tax bracket where every $1.00 spent on interest is $0.39 saved in taxes (think about that for a moment). Good for them! 

For folks that might not have busted their butts at work in their day-jobs to have that luxury, they might have to make up for that by busing their butts to find a great deal, because those deductions aren't as exciting if one is in the 15% or 25% marginal tax bracket. Once such a person busts their butt to find a deal that makes sense even with the tax goodies being not as good, good for them too!

Originally posted by @Lucas Mills :

@Ken Min

Thank you very much sir. I will do my own searching first then I may reach out for clarification if necessary.

Yes, the lease option (as opposed to just a buy and hold) sound like it has many advantages. I am wondering if I would have to continually be looking for new properties (assuming some of mine will sell), and how to eventually break out of that cycle or transition into something else. I.e., what would be a natural progression from this model.

I would like to be at the point where I am "financially free" and not needing to seek out additional properties within the next 5-7 years. That's not to say that I would quit altogether by any means. I just want my investments to reflect that goal so that it can be realized if desired. Doing a bunch of lease options sounds great for many reasons, but it also sounds a bit less "long-term", if we assume that at least some of them will sell. I don't really want to have to worry about that after 5-7 years or so.

Perhaps my question will be answered as I look into this more. Any more insight you have to offer is greatly appreciated! Thanks again for the help.

Here is a link to one of the explanations:

https://www.biggerpockets.com/forums/311/topics/47...

Originally posted by @Kyle M.:

Lucas Mills
So I think what you're saying by "self sustaining" you mean a property that you have to invest the initial down payment/ closing costs and then don't have to dump any more money into it after that.

I think it's definitely possible, but probably not on every property. I think you do your best to project out returns on each property and this gives you the best CHANCE that it will cash flow but at the end of the day some properties will just be losers. They just won't perform to your projections. You just want your winners to more than compensate for your losers.

Others will debate this, but I analyze a typical property as follows:

Vacancy 7%-10%
Insurance (specific to property type and location)
Maintenance 10%-15% - yes I lump all repairs and cap ex in one bucket. I either buy properties with brand new mechanicals and roofs or done a rehab to put in new mechanicals. Plus I plan on shorter term holds...not planning on holding for 30 years, probably more like 7-10 years.
Taxes (specific to that property of course)
Management - always account for this even if you are self managing. Your time is totally worth something isn't it?! I usually add a factor for lease up fees as well. For example if a PM charges 7% plus a 1 months rent for lease up, then I bump it up to 10%.

After all of these operating expenses, subtract out principal and interest, and you have your net cash flow. This number should be $150-300 for a single family, IMO.

At the end of the day this is just a projection, but at least it gets you in the ball park, and like I said above, gives you a reasonable chance to be cash flow positive. Out of my 6 properties, 4 are at or above projections, 1 is below but still cash flow positive, and 1 is a loser. But it's a loser because of a freak flood...which you can't really plan for in projections. This is one of the reasons you should always keep a healthy amount of cash reserves.

Hope this answers some of your questions!

Yes, this is exactly what I was getting at.

So, what are your numbers based on? Did you schedule out all of the CapEx items over the years to see how much you should be setting aside each month to prepare for them? Are your numbers based on something like that?

Hypothetically speaking, let's say you have 30 properties and 100k cash reserves. Over time, you draw from the reserves to pay for CapEx items, but you're also continually refilling your reserves with the monthly income from your properties. However, if your expenses are greater than your cash flow, then, eventually, your cash reserves will deplete unless you are contributing to them in some other way.

Ultimately, I don't want to have to contribute to my cash reserves forever. So how does one avoid running out of cash reserves? Do people just assume they'll have additional sources of income to help cover expenses until perhaps their properties are paid off and suddenly they have much more cash flow available? Are people counting on increasing rent over the years to help cover expenses, betting that the difference in rent will beat inflation and the cost of expenses?

I'm just trying to wrap my head around the long-term play, or how someone truly "retires", with rental property, and doesn't have to worry about working a second job to help cover expenses. How do you truly set yourself up for that? What if in the next 5-7 years when I have 30 some rental properties, I want to hand them all to property management and retire. What should I have done to make sure that I, personally, don't have to contribute another cent to my portfolio to help cover expenses, either in the short or long term?

If you buy properties that rent for well above your mortgage payment, as Kyle detailed above, then part of that spread goes into your reserves every month. That's what makes up your reserves--you shouldn't ever have to contribute to it (except maybe right at the start to start off with a balance). 

For example, I have a house with a mortgage of $1,700. My utilities cost about $100. The rent is $2,500. I set aside $300 every month into my reserves for repairs/capex, and still have a monthly profit of around $400.

You'll go for several months sometimes and not use any reserves, and then have a big repair and spend a lot. But as long as you estimated well as Kyle detailed above, it will be self sustaining AND leave you some profit every month.

Originally posted by @James Marshall:

If you buy properties that rent for well above your mortgage payment, as Kyle detailed above, then part of that spread goes into your reserves every month. That's what makes up your reserves--you shouldn't ever have to contribute to it (except maybe right at the start to start off with a balance). 

For example, I have a house with a mortgage of $1,700. My utilities cost about $100. The rent is $2,500. I set aside $300 every month into my reserves for repairs/capex, and still have a monthly profit of around $400.

You'll go for several months sometimes and not use any reserves, and then have a big repair and spend a lot. But as long as you estimated well as Kyle detailed above, it will be self sustaining AND leave you some profit every month.

Wow. Is this a real life example of a rental property? You have $800 left over after principal and interest? That just seems insane. I don't see you setting aside any amount for vacancy or property management, but you obviously have more than enough to cover those things in that example.

According to this post, I should be setting aside at least $182.75 each month for capital expenditures alone for an average, single-family house. That variable expense in and of itself seems to destroy most of the cash flow that's left after deducting the principle and interest on many homes that I've analyzed here in Springfield, MO. And that's before accounting for vacancy (maybe $45), repairs ($30?), and property management (10%, or perhaps $40 - $50 on the houses that cash flow here). That's a total of $307...

I don't think I have yet analyzed a property in Springfield that has had cash flow of over $300 after the principal and interest. Let alone another $150 - $200 on top of that after the fact!! We would be talking $450 - $500 in cash flow after P&I!! I have not seen that or anywhere CLOSE to it.

Does this mean I need to forget about my current city in terms of buy and hold?

@Lucas Mills

Great advice above! You are on the right track. Just a few comments to add...

Your percentages for CapEx/Maintenance are largely dependent on the age and build quality of the property, as well as the neighborhood (D properties might have a greater chance for tenants to trash the unit, or increase number of evictions, driving costs up). I generally only buy properties built in the last 10 years or less in B/C+ neighborhoods to keep those costs low starting out, but if you're buying older properties, you'll be spending a lot more. You may not have a choice, depending on your market. Even with newer places, I factor 10% for capex. If I had a 1950s or older house, I'd probably do 15-20%, which is why I don't bother with them. I have a $10k per property rule for reserves... a roof and HVAC at once could easily exceed that. I'll probably reduce that as I build my portfolio up, since it's less likely that all will have a catastrophe at once.

Another note on cash flow is that if you are getting $200/mo at the top of the market, and the market turns, that could turn to $0 or negative when you renew your lease. Make sure you understand what type of market you're buying into to make sure you're considering those possibilities in your analysis. Good luck!


Wow. Is this a real life example of a rental property? You have $800 left over after principal and interest? That just seems insane. I don't see you setting aside any amount for vacancy or property management, but you obviously have more than enough to cover those things in that example.

I budget those costs in my initial estimates, but in reality I've had just over 1% vacancy in the last 5 years so it's not an actual cost I have to deal with (they're in a very good rental market). For now, I self manage, so yea you'd want to add that one in too.

You seem to be running the numbers correctly. Sounds like you might need to look outside of town, or at a different property type. Have you tried looking at multi-family units? In some markets those have better rent ratios than single family homes.

Originally posted by @James Marshall:

Wow. Is this a real life example of a rental property? You have $800 left over after principal and interest? That just seems insane. I don't see you setting aside any amount for vacancy or property management, but you obviously have more than enough to cover those things in that example.

I budget those costs in my initial estimates, but in reality I've had just over 1% vacancy in the last 5 years so it's not an actual cost I have to deal with (they're in a very good rental market). For now, I self manage, so yea you'd want to add that one in too.

You seem to be running the numbers correctly. Sounds like you might need to look outside of town, or at a different property type. Have you tried looking at multi-family units? In some markets those have better rent ratios than single family homes.

You're right, multifamiles are better in terms of cash flow, but not THAT much better. It's funny, because I have guys telling me that you can do the BRRRR in Springfield "all day", but after running the numbers, it just doesn't seem very viable to me. And yet, at my local real estate meetings, there are guys who have been doing this for a few years and seemingly quite successful. But one of them told me, and I quote "if you have $200 after the principal and interest, you're doing well" -- What?!

I just don't get it. I even brought up the question of CapEx, repairs, vacancy, etc. in a meeting and was looked at with some degree of incredulity, like "what are you talking about?" kind of look. I just don't understand how these guys are doing this while seemingly diverting so little to the expenses category. I guess that doing lease option can mitigate a large percentage of the variable expenses since the tenant is supposed to be doing that, but it seems to me that, in order to be safe, you should account for those expenses regardless in the case that the tenant decides not to pay, or whatever the case may be. Maybe not?

I just don't know. It feels very confusing and a bit depressing, to be honest. The more I dig in, the less it seems like buy and hold works here in Springfield. Apparently, I need to find a market where the difference between the P&I and the monthly income is $800... But that introduces a whole host of other questions. Like, how do I find these markets, how do I invest in these markets, how do I do a BRRRR in a non-local market where I can't oversee the job and etc.?

Or, maybe I'm jumping the gun and missing some kind of critical piece of information that has so far eluded me. I would love to be proven wrong about the state of cash flowing properties in my own town, but it just doesn't seem to be that great.

this thread is enlightening as these are some of the same questions I've had @Lucas Mills ..i currently have a 4unit (2 duplexes) and i live in one unit and currently bringing in $3700 per month in income..Mortgage pmt $3148= $552 surplus, but i do pay utilities which average around $500 a month for all units so i usually have $30 to 50 left over. Once i move out and gain a new tenant that'll be at least an extra $1200 per month not too mention another tenants lease is almost up at which time i will potentially increase $50 or so. My goal is to have each unit individually metered which at that point potentially bring in @ least $500 more a month. So around $1700 per month off this one property not including vacancy, capex, maintenance reserves.  

This is somewhat minor, but one thing that can help your numbers is if you purchase it as a primary residence and live in it for a year before renting it out. The reason is that the bank gives you around a 0.75% better interest rate on a primary residence. 

What is the rent to price ratio on most of the stuff you are seeing? (i.e. a home that will rent for $1,000/month and costs $125,000 would be a ratio of 0.8%)

What I'm starting to think is that since expenses don't necessarily increase with income, I need to look at lower end properties in areas where the cost of living is higher in order to make a better spread. The properties where I live are just too cheap. The expenses run the cash flow into the ground.

Iam from springfield and I like the one percent rule bottom line if you have property pass the One percent rule it will cash flow but this is rare find now except north of chestnut which I do not recommend 

Originally posted by @James Marshall:

This is somewhat minor, but one thing that can help your numbers is if you purchase it as a primary residence and live in it for a year before renting it out. The reason is that the bank gives you around a 0.75% better interest rate on a primary residence. 

What is the rent to price ratio on most of the stuff you are seeing? (i.e. a home that will rent for $1,000/month and costs $125,000 would be a ratio of 0.8%)

Yeah, I'm familiar with the lower interest rates (and longer, 30-year fixed terms) of convention/FHA loans. However, while I may or may not do that for a single property, I'm thinking more in terms of portfolio loans because that's how I'll need to go if I hope to scale to any appreciable degree in the near future.

I recently became aware of a run-down property in need of about 30k - 40k worth of work which could be purchased for 7k. So let's assume that I was all-in at 37k, sort of a best-case scenario. This property then appraises at 60k, and I cash-out and get a mortgage for 37k. This property will likely rent for $550, give or take. That is a rent-to-price ratio of approximately 1.5%, and that's pretty good for Springfield, MO. Certainly, nothing on the MLS comes close from what I've seen.

But even at 1.5%, which seems not too bad, the expenses are too great for rent this low.

$550

- $216 (P&I for 37k portfolio loan at 5% amortized for 25 years)

- $45 (to cover 1 month of vacancy per year)

- $30 (somewhat arbitrary amount for misc. monthly repairs)

- $185 (CapEx)

- $55 (property management)

Total cash flow remaining: $19

This is supposed to be an example of a good deal, and I'm left with not even 20 bucks at the end of the month. I just don't get it. How are local investors doing anything but setting themselves up for future disappointment? Maybe they have some other exit strategy or something?

On low-priced properties like this, you need much higher rent-to-price ratios in order to make the numbers work. The reason is that all the fixed expenses like repairs and capex make up a much higher percentage of your monthly rent than they would on a house that rents for $2,000.

BTW, the example you gave above would technically be closer to a 1% property, because you're taking out a loan based on a value of $60k and it would rent for just $550.

You are exaggerating the capex also you can find descent manager for six percent the way you do your calculations is super conservative remember no guts no glory even in your example you are still paying principle and I consider this long term money saved 

Originally posted by @James Marshall:

On low-priced properties like this, you need much higher rent-to-price ratios in order to make the numbers work. The reason is that all the fixed expenses like repairs and capex make up a much higher percentage of your monthly rent than they would on a house that rents for $2,000.

BTW, the example you gave above would technically be closer to a 1% property, because you're taking out a loan based on a value of $60k and it would rent for just $550.

Even though the house would likely appraise for 60k, I would only "cash out" 37k, or what I was "all-in" at. I wouldn't take out a loan for the full 60k.

Originally posted by @Essam Elkady :

You are exaggerating the capex also you can find descent manager for six percent the way you do your calculations is super conservative remember no guts no glory even in your example you are still paying principle and I consider this long term money saved 

Essam, ironically enough, I felt that the number given in the CapEx article I linked to above (which is where I got that CapEx number), was a bit liberal. I thought it should probably be close to $200 if not a bit more.

Of course, paying down the principle is all good and well. But, I don't want to reap the benefits of my investments 25 years down the road, but rather 5-10 from now. In order to do that, I can't invest in properties that will only give me $20 each month when it's all said and done.

If I just choose to ignore CapEx, or at least ignore it to a certain degree, I feel it will only come back to bite me 10-15 years down the road when, "suddenly", addressing these CapEx items becomes evident and necessary.

That said, how much do you feel I should be putting back for CapEx?

Originally posted by @Lucas Mills :
Originally posted by @James Marshall:

On low-priced properties like this, you need much higher rent-to-price ratios in order to make the numbers work. The reason is that all the fixed expenses like repairs and capex make up a much higher percentage of your monthly rent than they would on a house that rents for $2,000.

BTW, the example you gave above would technically be closer to a 1% property, because you're taking out a loan based on a value of $60k and it would rent for just $550.

Even though the house would likely appraise for 60k, I would only "cash out" 37k, or what I was "all-in" at. I wouldn't take out a loan for the full 60k.

 Yea, so you'd technically be somewhere in between. The 1% rule is just a quick rule to help you see how well something would cash flow against your loan if you put 20% down. So for that purpose only, the ratio would actually be $550/$46,250. But that's getting into the weeds a bit.

It may be difficult to find cash flow in your area--sounds like you'll either need to:

1. Find a way to get a low purchase price on something
2. Look at another area
3. Settle for cash-flow neutral and be happy with the principle paydown and possible appreciation. Though it sounds like what you're really after is cashflow to live off.