Do most properties you buy cash flow positive?

62 Replies

Do most properties you buy cash flow positive? What percentage of properties that you purchase will cash flow positive when rented out? 95%, 90%, 80% or less? What is the risk of buying a property that does not cash flow positive? 

Do all condos and town homes in Texas cash flow positive? I am talking about in the Houston, Dallas, and Austin areas where the property taxes are high 2.6%+ and have high HOA fees.

I don't really understand the percentage of properties that cash flow positive and whether high property taxes in states such as Texas and high HOA fees always make the cash flow negative or what.

Any advice/insight is greatly appreciated. Thank you!

Originally posted by @Bryan Tasumi :

Do most properties you buy cash flow positive? What percentage of properties that you purchase will cash flow positive when rented out? 95%, 90%, 80% or less? What is the risk of buying a property that does not cash flow positive? 

Do all condos and town homes in Texas cash flow positive? I am talking about in the Houston, Dallas, and Austin areas where the property taxes are high 2.6%+ and have high HOA fees.

I don't really understand the percentage of properties that cash flow positive and whether high property taxes in states such as Texas and high HOA fees always make the cash flow negative or what.

Any advice/insight is greatly appreciated. Thank you!

I only buy houses that cash flow. The typical cash flow is $500 a month but some go as high as $1000 per month. If you want more info let me know.

Do all properties cash flow positive?   All the ones I buy do!!! All the properties I own are in Texas and usually at a minimum meet the 1% rule and thereby cash flow positive.  I even have some properties cash flow positive using a 15yr mortgage.  Properties regardless of length of mortgage term are paid off within 12 years due to the positive cash flow.  

In Texas, you don't need to speculate.  In California, yeah you have to be a speculator for the most part.....right.  In order to make money you need appreciation, no so in Texas.  That being said, here in Austin in some locales property prices have gotten out of hand and the only way some people will make money is if they experience appreciation.  

You are correct in observing property taxes are high in Texas.  You are also correct that when you buy a condo or even a house that has HOAs that will cut into your cash flow.  All those things have to be considered when buying.  I don't concern myself with condo/townhome fees or HOAs because i buy duplexes where there are no such fees.  I like being in control as much as possible and those fees are not always logical.  Increase taxes can be frustrating, but when I experience them I use them as motivation to increase my rents.  I have become lazy at times in raising rents each year but when I see taxes rise 40-100% I get motivated to increase my rents.  As much as taxes have increased, my rents have gone up more.  I figure if the city or county needs to be paid more, then so do I.  

@Bryan Tasumi
Probably about 95% of properties (particularly single family) do NOT cash flow positive.

But most investors, including myself, will only buy out of the 5% that will produce positive cash flow.

Most investors on this forum will tell you that they only buy properties that they can plan to produce cash flow. Of course, things don’t always go according to plan and sometimes you just have a tough property that costs too much too upkeep or you have trouble keeping filled with a tenant.

No....ALL OF THEM DO.  Why would you buy a property for cash flow, and have negative cash flow?

What's the risk of buying a negative cash flow property?  Try:

1 - running out of money

2 - needing to work harder at your job to pay for someone else to live in your house

3 - bleeding your seed money you could use for future investments

...there's more, but it just gets worse.

Buying a cash flow property with negative cash flow, is like a hockey team starting the game out by spotting the other team a goal...and every period spotting them another goal.  The more negative the cash flow, the more goals you spot the other team/period.

Don't think that if you put up a bigger down payment it will change your negative CF to positive CF.  All you're doing is paying for all that negative cash flow up front.

I’m a golfer. There’s a saying that most bets are won or lost on the first tee. Real estate is like that. Do the due diligence and run some numbers. In general I won’t buy anything that doesn’t cash flow $150 per door. The overall monthly rent to FMV of my portfolio is 1.3%.

If you’re serious about REI you need to become an expert at running the numbers. Your question indicates you haven’t done that. There’s only one way to learn.

@Bryan Tasumi I would never buy anything that didn't produce positive cashflow.

There isn't any area where everything has positive cashflow.

Start analyzing properties and look somewhere outside of the top 3 metros in Tx.

Jordan Moorhead, Real Estate Agent in MN (#40542303)

Let's put it this way - you only have so much financing available to you until your DTI becomes a problem. If you fill your portfolio with properties that do not cash flow, you will get pinched quickly or have to rely on portfolio lenders. If you can't cash flow at lesser rates these sure aren't going to help.

Only way to make it scalable is to buy properties that do cash flow, these may improve your DTI and they shouldn't hurt it.

There are some situations where a negative cash flow makes sense. Simple example, if you can buy a house for $0 down that cash flows $ -100 a month, from a "cash in bank after 1 year" view, that's the same as putting $2400 down for a house that cash flows $100 a month. In both situations after 1 year you are down $1200 out of pocket...and the first situation is actually better if you take into account time value of money.

Obviously a very simplistic example and there are tons of other factors involved...and lots of assumptions to be made.

Originally posted by @Bryan Tasumi :

Do most properties you buy cash flow positive? What percentage of properties that you purchase will cash flow positive when rented out? 95%, 90%, 80% or less? What is the risk of buying a property that does not cash flow positive? 

Do all condos and town homes in Texas cash flow positive? I am talking about in the Houston, Dallas, and Austin areas where the property taxes are high 2.6%+ and have high HOA fees.

I don't really understand the percentage of properties that cash flow positive and whether high property taxes in states such as Texas and high HOA fees always make the cash flow negative or what.

Any advice/insight is greatly appreciated. Thank you!

 Absolutely, at least in the financial models we build when buying them they do.  We would never buy a house that didn't project to cash flow, and we wouldn't keep a house whose numbers we didn't think would continue to cash flow.

You will find things will come up, especially on newly purchased properties, in the first year or two we often end up needing to do some capital investment, paint, appliances, roofs etc.  So sometimes it takes 12-18 months to start seeing that cash flow. 

In our market, I think there is a long term capital appreciation play, we also buy in the path of progress so in the future a few of our properties could possibly redeveloped to unlock even more upside.

And I don't think you will immediately get rich with cash flow, it just doesn't happen that way, at least not immediately in most markets.

Others have talked about it, cash flow is your safety net, its what lenders will look at to give you loans, its the margin you have to pay the bills.  I would never go into an investment with no cash flow , or no expectation in the near future of cash flow (say a rehab or building).

Originally posted by @Andrew Allen :

There are some situations where a negative cash flow makes sense. Simple example, if you can buy a house for $0 down that cash flows $ -100 a month, from a "cash in bank after 1 year" view, that's the same as putting $2400 down for a house that cash flows $100 a month. In both situations after 1 year you are down $1200 out of pocket...and the first situation is actually better if you take into account time value of money.

Obviously a very simplistic example and there are tons of other factors involved...and lots of assumptions to be made.

I completely disagree. Your ROI on putting 0% down is negative, you have no return, you have a money pit. In your second example your ROI is 50%. Although you call this a simplistic example you will find the same situation most, if not all properties, that do not cash flow.

Your first example is not someone who is buying an asset, they are purchasing a liability.  I only buy assets.

Negative cash flow can work with appreciation but I do not purchase with the expectation of any appreciation.

You can’t calculate ROI from that example. Even assuming $0 appreciation you’d be ignoring amortization and depreciation. I’m just saying if you look beyond cash flow sometimes it might make sense. More extreme example, would you rather buy a house for $0 down with slightly negative cash flow or one with positive cash flow for $40k down? Again you can’t calculate ROI with this example but there are situations where taking the house for $0 down makes sense.

Jersey investor here. Even in the state that has the distinction of having the highest property taxes, 100% of my properties cash flow.
It might be a good rule to be picky!

Originally posted by @Andrew Allen :

You can't calculate ROI from that example. Even assuming $0 appreciation you'd be ignoring amortization and depreciation. I'm just saying if you look beyond cash flow sometimes it might make sense. More extreme example, would you rather buy a house for $0 down with slightly negative cash flow or one with positive cash flow for $40k down? Again you can't calculate ROI with this example but there are situations where taking the house for $0 down makes sense.

Easy answer, I would rather buy the one with positive cash flow!  I purchase assets, not liabilities!  The $40k down may not meet my criteria but on the cover I am buying an asset, not a liability.  I recently purchased a place with $60k down.  The cash down doesn't matter if the numbers work.   Buying a place with $0 down that has crappy numbers will rarely work.  May be better off hitting the roulette wheel in vegas.  At least it won't be a slow drain on you the next 5 years of ownership.

Sure - there may be some instances that you can get a tax benefit greater than your lost cash flow but this is stupid to shoot for and not a good idea for people without unlimited financing. Negative cash flow investments will negatively impact your DTI and you will max out quickly.

The general answer here is he$% no!

@Bryan Tasumi Err...mine do...but I don't invest in Texas and I think you'll have a tough time if you're looking in downtown Austin or University Park in Dallas.  Texas is a little unique (for an out-of-state investor) in that you pay sky high property taxes but don't get the benefit of zero state income tax.  But Texas is like any other market.  When you go to the most desirable areas you're going to have a tough time cash-flowing.  Rents just don't linearly rise with property values.  Just like where you are: I'd imagine it would be really tough to find something that cash-flows in Hayward but it would be absolutely impossible in Woodside or Atherton.  

The risk in buying a non-cash-flow-positive property is that you...well...bleed cash.  Then if there's any economic hiccup you bleed more cash.  And nothing is less fun that bleeding cash on a property that isn't appreciation.  And if the market dips you're bleeding cash on something that isn't worth what you paid for it (on the open market).  

My general thought process is that the more likely you are to be bidding against owner-occupants the less likely you are to cash-flow.  

The only way a person buys a investment property that doesn't cash flow if they are totally new and or don't know what their doing. A person should know all their expenses for this property and know how to calculate their NOI and Cap rate if it's a large MFH but I think cash on cash return is the most important number to pay attention to. In the business and investment side of real estate you HAVE to know your numbers. This isn't just vital to landlords but also fix and flippers(flips) and wholesalers as well. You can't go in blindly wishing and hoping your "deal" is good or not.

To the original OP: I'm not pointing anyone out that has replied to your question but the truth is, you can run all the models and valuations you want, all looks good and then something happens once keys exchange hands. I'll be the first to admit it, my first purchase made sense when I ran the numbers. The market was white hot, my mom bought a place in the same neighborhood the year before and her SFR appreciated $30K in one year. That was pretty much the norm in this area, $30K appreciation year after year. I had to get in on this, so I cashed out my stock holdings and made a down payment on a brand new 3/2 SFR on a corner lot. A year later...yup, my place went up $30K in value and the rent at the time allowed me to cash flow, even with a hired property manager. Life is good, right?!

Well, I made the "life is good" statement in January 2007. In Jan 2008, my place was up another $30K in value. And we all know what happened later in 2008. Equity, gone. Not only that, value dropped 30% below original purchase price. Rent dropped and even when you got a tenant moved in, you'd evict them for not paying 6 months later or they would voluntarily vacate because they got laid off. Couldn't sell it, couldn't cash flow. I learned a hell of a lot from that experience and it didn't deter me from investing in RE.

The above happened but it wasn't because I was greedy or over-leveraged. I put 20% down and my numbers all worked at the time. The initial price was just what was out in the market in this area at the time, you couldn't find anything cheap. I had to buy that house before it was even finished being built if I wanted to get what looked like a good deal. And it was for several years before something changed. My situation is not unique, this same thing happened to majority of people in 2008-2009. I imagine you don't have anyone posting about mistakes in this post because they got out of RE entirely after that experience and all you're left with now are veterans who don't make mistakes like I did.

Long story short, yes, all investment properties you buy should cash flow from the very first day and if they don't, you sell them...even if it has to be at a loss. Because RE investing is just like any other investing, you make educated GUESSES as to the future outcome of the choices you are making today. 

It really isn't as scary as you think and in comparison to other investments, RE is generally an easier investment to understand since it's a physical thing you can see and feel so I'm not trying to scare you off from it. But I don't want you to think that everyone is a brilliant investor who never lost money in their RE ventures. I'm a regular guy who made mistakes, learned from them and leveraged those lessons to catapult myself forward. 

Can we have another 2008? Absolutely! Will we have another 2008? No one knows. But I do know that thanks to my 2008 lessons, I'd never agree to buy a property where I'm getting less than $350 a door. Just doesn't fit my investing model.

Fail fast and don't get emotionally attached to any investment you make. You have to be cold and calculated when analyzing your positions, makes it easier to cut off the losers and let the winners run.

I have three properties I have to feed every month due to financing. If the terms were longer they would cash flow nicely but I am racing against time to be free and clear of debt. I have 10 other properties that cash flow and most are free and clear so I can afford to feed the three until I pay off the debt. Starting in 2019 I start extinguishing the mortgages and this will got on in 2020 and 2021. If I didn't have plenty to fall back on I would never consider this. These mortgage were between 3-5 years from private lenders. Of course, most of the payment is principal which cannot be written off. Still, this works for me but I would not encourage everyone to do as I do. It is right for ME! 

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

@Bryan Tasumi

Hi Bryan, I just wanted to give a little bit of Math to show that in all reality... It's not the Investment that Cash Flows.... it's the INVESTOR that Cash Flows the Investment.

I know a lot of people think it's the Investment that Cash Flow, but I am putting forth the Math which shows a different observation, at least in my eyes.

I have 3 Scenarios but in all 3 scenarios you are buying the SAME property for $100k, Rent of $1,400 per month, expenses of $1k per month, just with different Financial options.

Scenario 1: You put ZERO down, Finance it 100%, your interest rate is sky high at 7%, your Cash Flow? NEGATIVE $265 per month.

Scenario 2: You put 30% down, Finance it 70%, your Interest Rate drops to 5.5%, your Cash Flow? BREAK EVEN (or just about $3 per month).

Scenario 3: You put down ALL CASH, ZERO FINANCING, your Cash Flow? $400 per month!

Here is the Spreadsheet with the MATH:

The Investment didn't Change.... it was the FINANCING THAT CHANGED... who is incharge of the Financing? THE INVESTOR.

That's why I say that it's the INVESTOR that CASH FLOWs the INVESTMENT... not the opposite.

I think the better way to put your original question may be rephrased as "Since you the INVESTOR Cash Flows the Investment... are you confortable with a NEGATIVE Cash Flowing Scenario and what Percentage of your Investments to you have it go Negative?"

Once you rephrase it this way, you can now see that if your Credit and other qualifications increase to the point where you can get better terms, you can even refinance the Investment and change a negative cash flow situation to a positive one!

Another option is to increase the rents that were under market or force appreciation with renovations, etc.

I know Math isn't a good topic sometimes... but I think an analysis can help shed light on your original question.

I only buy cash flow properties for the simple reason that my real estate investments are my primary income source. I am not investing for the purpose of parking excess cash.

I am in business to make money, daily, weekly, monthly, not something my kids will inherit and immediately sell..

Originally posted by @Llewelyn A. :

@Bryan Tasumi

Hi Bryan, I just wanted to give a little bit of Math to show that in all reality... It's not the Investment that Cash Flows.... it's the INVESTOR that Cash Flows the Investment.

I know a lot of people think it's the Investment that Cash Flow, but I am putting forth the Math which shows a different observation, at least in my eyes.

I have 3 Scenarios but in all 3 scenarios you are buying the SAME property for $100k, Rent of $1,400 per month, expenses of $1k per month, just with different Financial options.

Scenario 1: You put ZERO down, Finance it 100%, your interest rate is sky high at 7%, your Cash Flow? NEGATIVE $265 per month.

Scenario 2: You put 30% down, Finance it 70%, your Interest Rate drops to 5.5%, your Cash Flow? BREAK EVEN (or just about $3 per month).

Scenario 3: You put down ALL CASH, ZERO FINANCING, your Cash Flow? $400 per month!

Here is the Spreadsheet with the MATH:

The Investment didn't Change.... it was the FINANCING THAT CHANGED... who is incharge of the Financing? THE INVESTOR.

That's why I say that it's the INVESTOR that CASH FLOWs the INVESTMENT... not the opposite.

I think the better way to put your original question may be rephrased as "Since you the INVESTOR Cash Flows the Investment... are you confortable with a NEGATIVE Cash Flowing Scenario and what Percentage of your Investments to you have it go Negative?"

Once you rephrase it this way, you can now see that if your Credit and other qualifications increase to the point where you can get better terms, you can even refinance the Investment and change a negative cash flow situation to a positive one!

Another option is to increase the rents that were under market or force appreciation with renovations, etc.

I know Math isn't a good topic sometimes... but I think an analysis can help shed light on your original question.

 You know math eh.  The only thing that changed on the last two, was how long it took you to catch up, and how much of your negative cash flow you paid up front.  All three are still losers.

Scenario #1 above:  0 down payment; Negative CF of $265/M & $3,180/yr

Start out of pocket:  $0
Cash Flow/year:  ($3,180) ...meaning you fall behind an additional $3,180 every year for 30 years, +$4800/yr after that
Break Even Point:  40 years; 7 months (your great-grandkids will be thrilled)

Scenario #2:  $30k DP; the illusion of $36/Yr PCF
Cash Flow/yr:  $36 every year for 30 years, then +$4800/yr after that
Break even point:  6 years

Scenario #3:  $100,000 DP; the bigger illusion of $4800/Yr PCF
Cash Flow/yr: $4800 every year
Break even point: 20 years; 10 months

Losses due to lost opportunity returns;  Assumed 5% simple interest per year until break even point
Scenario #1:  None
Scenario #2:  $1500/year x 6(yrs) = $9,000
Scenario #3:  $5,000/year x 21 (yrs) = over $100,000

@Mike S. The one cash flow $500 to $1000 do you have mortgage on it? I like to have more info of those properties. How much is it?

@Joe Villeneuve You are correct sir, as presented @Llewelyn A. three scenarios are losers and don't really make a point other than no investor would buy any of them.  His math is all messed up.  If I am buying a 100k property and I am going to have $1000 expenses each month above and beyond the mortgage then it is a no go no matter how much I'm putting down.  

@Russell Gronsky  your story is one that I would have though happened in California but I can see it happening on the east coast too.  But there are many sub plots to your story that needs to be highlighted.  

Investing in low income cash flow positive real estate in a community that is gaining in population minimizes market risk.  You still have to manage the property.  When you say it took you 6 months to evict that either says your property management needs a lot of work or stay away from that legal environment for which it requires you 6 months to evict a tenant. 

Buying real estate just because it going bat crazy up still requires due dilly if you will. We all have heard stories of when people bought property and later because loss of job or housing down turn they lost it to foreclosure or short sell right.  But I have never, ever heard of this:  I'm renting apartment for $1200 for the last three years, I go to the leasing office to renew and they tell me it is my lucky day, times are hard and they are going to cut my rent in half to $600 a month.  Remind you, I'm not talking rents falling from $4000 a month to $2000.  I am talking low income rents (defined as $1200 or below).  You see those people don't lose jobs in a down turn and if they do there are plenty of more people willing to step in.  Prices of real estate go up and down but rents usually stay stead especially in a community that is increasing in population.

In Texas most seasoned investors who's goal is cash flow could give a **** about appreciation.  Don't get me wrong, we like it but if my properties drop 30% tomorrow that would be fine as my property tax would go down and I would be raising rents.  Sounds counter intuitive right.  Let me explain. I have been buying investment real estate since 2002 and still buying last one 3 months ago.   I buy duplexes because they CASH FLOW and THAT IS WHAT I WANT.  During 2008-2010 my rents were steady or went up, because when you renting 800 to 1000 each side there are all of sudden more renters to choose from because all the foreclosures and short sales and the tougher restriction on buying cause the rent pool to go up!!!!!!!!!!!!!!!    

Now I get it, I can see rents falling in places like Detroit........community losing population big time.  My due dilly would tell me not to buy there.   In Texas, if you can manage property effectively, find property that cash flows well day one with 20% down and stay in the range of rents $1200 or below you should feel good about market dynamics regardless of what the economy is doing.  

I bough a duplex four years ago in Austin for 70k and could have sold it in a week without putting anything in it for $110k.  But why would I, my goal was CASH FLOW so I COULD RETIRE.  Now each side is renting for $1000 a side life is good.  

It is you east and west coast guys that are stuck on appreciation and that is fine, it comes with more risk, you know that occassionally 2008 scenario, but when the market is humming it makes for good banter at the Christmas party.  Its like the tortoise and hare.  I am the tortoise and the appreciation guys are the hare.  We know who wins the race with less stress and worry.  

I see people buy houses that don't cashflow. Brand new deplexes that I know aren't cash flowing. It must meet their needs somehow. It wouldn't meet my needs. I've never seen a 1% that didn't cash flow. From 30,000 feet I can analyze a deal. If it's 1% it probably works. I have made my own exel spreadsheet where I can put in ROI with just the cashflow then I look at ROI with the back end( Interest, depreciation, and principle buy down) I personally don't include appreciation in my calculations because there's no guarantee on appreciation, its just a bonus. I never buy a rental that doesn't cashflow. I recently did a deal with a partner where he put in all the money and financed it. Even with me on board he's still cashflowing and making a total 23.9% on his cash in the deal. Reach out to me with any questions. Would love to give back.

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