Lake Elsinore, CA · Member since 2018 · 235 posts · 300 votes
I have probably a dumb question, so bear with me!
I've seen the $100/door evaluation criteria discussed, and cashflow also discussed. I've listened to a few podcasts where people are discussing cashflow with regards to figuring out their monthly "number" if they're trying to achieve a certain financial goal.
When people are discussing cashflow, is the $100/door method typically what they are referring to? I ask because when running my own analyses, this number is vastly different compared to say, the 1% or 50% methods.
In any case, if I'm using that $100/door as my benchmark, then I need about 40 doors to achieve my own financial goal...which means I should have started this at 20, not 36. Ha ha.
I would love to hear your own thoughts about how you view your cashflow. I'm primarily looking at this through the view of a rent-and-hold investor.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
8y
@Courtney M. I like to get $300 per door but I have gotten less when I put them on a 15 year mortgage versus 30. The more cash flow the better, but there are other factors. Your cash flow per door will change depending on down payment and loan term. I think the $100 rule comes from the idea that anything less than $100 is like working for free. There are other ways to meet your financial goal. For example, lets say you paid cash for a fourplex and each unit rents for $1500 per month. Total monthly income is $6000 and hard expenses are $2000 per month, leaving $4000 cash flow. In this example, one property will meet your financial goal (but you had to pay cash for it). Alternately you could finance an apartment building with 40 units, each cash flowing $100 per month. Both examples meet your financial goals today. The difference is the apartment building is worth way more money and with mortgage pay down, will produce way more income in the future.
Cash flow is only income stream of real estate investing. Keep in mind the tax benefits, equity growth through mortgage pay down and appreciation are the other aspects.
I bought a foreclosure in 2007 and 2008 that I flipped so I did make money on appreciation.
Good for you - you found a deal and made money flipping it and your rehab, not likely on appreciation. And if you "flipped it" this presumes you didn't hold it until 2017 and sell it. That would not be a "flip" by most people definitions. The goal in flipping a property is to do it fast so you can avoid any market downturn, anyone flipping isn't boasting about making appreciation.
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
To the OP - $100 per door is a metric that may work in some areas and it may not work in others. It will also depend a bit on the size of the investment. $100 per door works a lot better for areas where rents are $500-$600 per month but you take on more risk if you are getting the same return on a place that rents for $2,000. Why? Because it will only take a small percentage drop in rents to wipe out your cash flow at the greater rent. Then you likely have a larger loan on place with higher rents so the chances of it hitting your pocketbook are higher.
People buying larger apartment complexes, say 50+ units may be OK with $100 per door because that is $5,000 per month in cash flow and it may meet the returns of their investors. At 50+ units you have enough income that you can weather the market better if rents drop. Also in pruchasing this type of property there is usually more time spent on getting CapX and the repairs budget correct. On a smaller property at $100 per door one error in CapX or other reserves will quickly wipe out years of cash flow. ..
If you are looking at a SF home or a small duplex many of us would not deem $100 per door worth the hassle or risk of taking out a loan.
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
8y
@Courtney M. this is an opened ended question. It all depends on the PP and # of units.. You need to make your decision based on the % net per year you want, not on $100 per door. Me personally , I will only do a deal with not less then 15% ( worst case ) net per year, most are 20% , good luck and all the best.
I bought a foreclosure in 2007 and 2008 that I flipped so I did make money on appreciation.
Good for you - you found a deal and made money flipping it and your rehab, not likely on appreciation. And if you "flipped it" this presumes you didn't hold it until 2017 and sell it. That would not be a "flip" by most people definitions. The goal in flipping a property is to do it fast so you can avoid any market downturn, anyone flipping isn't boasting about making appreciation.
Nope. I did not do any rehab to it. I just held onto it for about 6 months with a short term rental and sold it. Didn't put a dime into rehabbing it.
I bought a foreclosure in 2007 and 2008 that I flipped so I did make money on appreciation.
Good for you - you found a deal and made money flipping it and your rehab, not likely on appreciation. And if you "flipped it" this presumes you didn't hold it until 2017 and sell it. That would not be a "flip" by most people definitions. The goal in flipping a property is to do it fast so you can avoid any market downturn, anyone flipping isn't boasting about making appreciation.
Nope. I did not do any rehab to it. I just held onto it for about 6 months with a short term rental and sold it. Didn't put a dime into rehabbing it.
In a time period of 6 moths you either A) got lucky, or B) purchased it under market value when you bought it and sold it for market price, or slightly higher. In this time period closing and selling costs alone will wipe out most of any profit.
This is the internet so you will likely disagree with me but I am guessing your plan was not to purchase this house to get 6 months of appreciation. Maybe STR didn't work out or you saw the market declining and wanted to escape while you were still ahead. If this is your approach to investing it is a new one to me.
I have to agree with John's leaning on this. Appreciation is a much longer term game than 6 months and if you made money on the deal due to appreciation alone, you got extremely lucky due to the short time you held it.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
8y
You are switching between numbers and percentages flippantly. Your never going to come to a coherent answer confuting relative and absolute calculations
Rental Property Investor · Cleveland, OH · Member since 2018 · 191 posts · 432 votes
8y
I'm a seasoned investor with over 120 units pulling 30% ROI. I have my own property management company just for my properties only. I partnered up and purchased 44 doors this year already. I'm open to more partnership opportunities. were in Cleveland ohio. check me out on LinkedIn Frank Wolter
Rental Property Investor · Manchester, NH · Member since 2017 · 45 posts · 51 votes
8y
Whether $100 or $200 or $300 per door is worthwhile is completely dependent on the purchase price of the property. If the unit cost is $50K with $10K down, then $100/month would be a 12% COC return. But if the unit cost is $150K, as it is where I'm from, then $300/month would be need for that 12% COC return.
It sounds like we might need another ratio to go along with the 1% and 50% Rules. $200/door/month for every $100K of property correlates to a 12% COC return if a 20% down payment is made. The "0.2% Rule" isn't very easy to remember or say, but maybe it's a good rule of thumb to keep in mind when comparing properties of significantly different values or calculating the number of units required to reach financial freedom.
I will be ready for the next recession to grab up cheap houses for cash again when all the over-leveraged investors implode...
Why will leveraged investors implode if/when there's a recession? Is that automatic?
We always know WHAT will happen with investing, so yes, leveraged investors will implode when there's a recession and this implosion is automatic.
What we don't know is WHEN this will happen. This month? Next year? Next century? Mr. Market gets his jollies by keeping us humans in suspense.
I, and many other investors I know, have lived through more than one recession, with debt, and haven't imploded yet. It isn't the debt that makes the implosion (if at all), it's the low cash flow that offers no buffer.
I agree that when the cashflow can support the debt payments, the state of the economy is not relevant.
When debt has to be called in by the bank (or a brokerage firm has to issue a margin call) because the prices of the assets securing the debt have declined sharply, the owners of those assets need to raise cash quickly and become motivated sellers in a buyers market. For every seller of an asset, there has to be a buyer on the other side of the transaction. Price is determined by the side of the transaction that has the greater urgency to make sure the deal gets done (Rise of the Superrich Hits a Sobering Wall).
Regardless of why a distressed asset is for sale (the owner can't make the payments or the owner has to sell quickly), someone waiting on the sideline with cash has the opportunity to scoop up a bargain.
Why would a bank call a note due, if the payments are being made?...and if the property is cash flow positive, the payments should be made.
Ever heard of Dave Ramsey? He had millions in debt called on his rentals when he was in his early twenties. Lost it all.
He had certain kind of loans that were short term that's what caught him. If you have a regular loan you shouldn't have that problem. However with that being said, you can get yourself in a bind if you are max out on your equity on all your properties.
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
8y
Courtney M. ,
Great post. You’ve started a healthy discussion. Here’s my opinion:
As others have stated, I’ve heard the term “cash flow” used many different ways and it seems to mean different things to different people. For example, I’ve heard one podcast host (who has received some pretty unfavorable reviews on here recently for his turnkey business) say things like, “We buy properties for $50,000 that cash flow $700 or $800 per month.” No, you don’t. He’s talking about “gross rents” as cash flow. Very different things. I’ve heard others refer to “cash flow” as gross rents minus PITI. Again, this is wrong. What I think most investors on here will agree with, “cash flow” refers to rental income minus all expenses, reserves, and debt service (if any). Here’s how I look at it when I run my numbers and talk about cash flow:
Gross Rents
- 8% vacancy (roughly 1 month/yr; this also covers lease renewal fees, tenant placement fees, etc.)
- 10% property management fees (I never have, and plan to never have to, manage my own properties)
- 5% cap-ex reserve (for big ticket items; I buy turnkey that have all major things replaced as part of the rehab, so shouldn’t need to tap into this fund for a long time, but important to start building it up)
- 5% maintenance (for ongoing expenses that pop up, tenant turnover, etc.)
- PITI (debt service, including taxes and insurance which are escrowed)
= Cash flow
I’ve been buying “1% properties” where my minimum cash flow that I would consider acceptable is $100/month, although I’m getting closer to $150-$175/month. These are purchased at or above market from a reputable turnkey operator with in-house property management. I wouldn’t invest, personally, any other way. I realize it will take me longer to reach my passive income goals this way, but I’m okay with that because without turnkey, I likely would not invest in real estate. These cash flow numbers, when coupled with other metrics (principal pay down by tenant, depreciation loss on paper, ability to leverage at 5:1, etc.) still blow most average annual stock market returns out of the water - and that’s factoring 0% appreciation. Hope this helps. Many people will disagree with me, but I’m fairly comfortable with my strategy so far.
Los Angeles, CA · Member since 2016 · 3 posts · 1 vote
8y
@Courtney M. We had the same question thanks for asking! My husband practically said the same thing about the cash flow 😂 then again he’s not the entrepreneur in the family.
Rental Property Investor · Venetia, PA · Member since 2015 · 107 posts · 47 votes
8y
This. Those examples you point out aren't cashflow, it's spending your reserves.
In fact I'd argue for higher repairs and Capex. I figured out at one point what a ten year period of major and minor repairs/systems replacements, a few turnovers of tenants, and normal routine repairs would be. I figured about 27K would cover it and I'd never have to dip into my own pocket (for a SFR).
On a monthly basis this equates to 225/month, so I make sure my capex and repairs are at least that....8% PM, 8% vacancy (about a month's rent a year at 8%)....Take out taxes, insurance, mortgage, etc...and see if it still "cashflows" to a COC ROI that I like.
for my logic this also becomes an argument for not investing in stuff that rents <$650 a month, or only investing in small multi at that price range. I don't see how the property pays for its own repairs there.
Courtney M. ,
Great post. You’ve started a healthy discussion. Here’s my opinion:
As others have stated, I've heard the term "cash flow" used many different ways and it seems to mean different things to different people. For example, I've heard one podcast host (who has received some pretty unfavorable reviews on here recently for his turnkey business) say things like, "We buy properties for $50,000 that cash flow $700 or $800 per month." No, you don't. He's talking about "gross rents" as cash flow. Very different things. I've heard others refer to "cash flow" as gross rents minus PITI. Again, this is wrong. What I think most investors on here will agree with, "cash flow" refers to rental income minus all expenses, reserves, and debt service (if any). Here's how I look at it when I run my numbers and talk about cash flow:
Gross Rents
- 8% vacancy (roughly 1 month/yr; this also covers lease renewal fees, tenant placement fees, etc.)
- 10% property management fees (I never have, and plan to never have to, manage my own properties)
- 5% cap-ex reserve (for big ticket items; I buy turnkey that have all major things replaced as part of the rehab, so shouldn’t need to tap into this fund for a long time, but important to start building it up)
- 5% maintenance (for ongoing expenses that pop up, tenant turnover, etc.)
- PITI (debt service, including taxes and insurance which are escrowed)
= Cash flow
I’ve been buying “1% properties” where my minimum cash flow that I would consider acceptable is $100/month, although I’m getting closer to $150-$175/month. These are purchased at or above market from a reputable turnkey operator with in-house property management. I wouldn’t invest, personally, any other way. I realize it will take me longer to reach my passive income goals this way, but I’m okay with that because without turnkey, I likely would not invest in real estate. These cash flow numbers, when coupled with other metrics (principal pay down by tenant, depreciation loss on paper, ability to leverage at 5:1, etc.) still blow most average annual stock market returns out of the water - and that’s factoring 0% appreciation. Hope this helps. Many people will disagree with me, but I’m fairly comfortable with my strategy so far.
This. Those examples you point out aren't cashflow, it's spending your reserves.
In fact I'd argue for higher repairs and Capex. I figured out at one point what a ten year period of major and minor repairs/systems replacements, a few turnovers of tenants, and normal routine repairs would be. I figured about 27K would cover it and I'd never have to dip into my own pocket (for a SFR).
On a monthly basis this equates to 225/month, so I make sure my capex and repairs are at least that....8% PM, 8% vacancy (about a month's rent a year at 8%)....Take out taxes, insurance, mortgage, etc...and see if it still "cashflows" to a COC ROI that I like.
for my logic this also becomes an argument for not investing in stuff that rents <$650 a month, or only investing in small multi at that price range. I don't see how the property pays for its own repairs there.
Courtney M. ,
Great post. You’ve started a healthy discussion. Here’s my opinion:
As others have stated, I've heard the term "cash flow" used many different ways and it seems to mean different things to different people. For example, I've heard one podcast host (who has received some pretty unfavorable reviews on here recently for his turnkey business) say things like, "We buy properties for $50,000 that cash flow $700 or $800 per month." No, you don't. He's talking about "gross rents" as cash flow. Very different things. I've heard others refer to "cash flow" as gross rents minus PITI. Again, this is wrong. What I think most investors on here will agree with, "cash flow" refers to rental income minus all expenses, reserves, and debt service (if any). Here's how I look at it when I run my numbers and talk about cash flow:
Gross Rents
- 8% vacancy (roughly 1 month/yr; this also covers lease renewal fees, tenant placement fees, etc.)
- 10% property management fees (I never have, and plan to never have to, manage my own properties)
- 5% cap-ex reserve (for big ticket items; I buy turnkey that have all major things replaced as part of the rehab, so shouldn’t need to tap into this fund for a long time, but important to start building it up)
- 5% maintenance (for ongoing expenses that pop up, tenant turnover, etc.)
- PITI (debt service, including taxes and insurance which are escrowed)
= Cash flow
I’ve been buying “1% properties” where my minimum cash flow that I would consider acceptable is $100/month, although I’m getting closer to $150-$175/month. These are purchased at or above market from a reputable turnkey operator with in-house property management. I wouldn’t invest, personally, any other way. I realize it will take me longer to reach my passive income goals this way, but I’m okay with that because without turnkey, I likely would not invest in real estate. These cash flow numbers, when coupled with other metrics (principal pay down by tenant, depreciation loss on paper, ability to leverage at 5:1, etc.) still blow most average annual stock market returns out of the water - and that’s factoring 0% appreciation. Hope this helps. Many people will disagree with me, but I’m fairly comfortable with my strategy so far.
exactly chris the business does not have enough GROSS cash flow to sustain itself or in another words rents are not high enough.. although if you can break even that's not the worse thing is you can throw a little at paying down your debt each month and get them paid for low value rentals should be owned free and clear to make any real spendable Net cash flow
Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
8y
@Courtney M. That is definitely a way to look at it if your planning on scaling. Like you said, 100/door with 40 doors is pretty solid. You don't have to be 20 to scale a business. Especially if you have the ability to purchase a larger apartment building, you could get 10-20 doors in one swoop!
Whether $100 or $200 or $300 per door is worthwhile is completely dependent on the purchase price of the property. If the unit cost is $50K with $10K down, then $100/month would be a 12% COC return. But if the unit cost is $150K, as it is where I'm from, then $300/month would be need for that 12% COC return.
It sounds like we might need another ratio to go along with the 1% and 50% Rules. $200/door/month for every $100K of property correlates to a 12% COC return if a 20% down payment is made. The "0.2% Rule" isn't very easy to remember or say, but maybe it's a good rule of thumb to keep in mind when comparing properties of significantly different values or calculating the number of units required to reach financial freedom.
It would be very tough to get $200/door/month per $100k of property value.
You're saying a $300k property should cash flow $600/month using this formula.
Here in my market most properties are $300k+ and they do not cash flow anywhere near that.
You would never find a deal if you used this as a rule of thumb or guideline in my area.
I'm not saying these numbers aren't attainable elsewhere, just that they aren't in many markets.
@Courtney M. - I use the 1% rule when first analyzing a property. If the property isn't even close (i.e., assumed monthly rents are way less than 1% of the list price, or more appropriately, to the assume value), I'll go to the next listing. However, if the #'s are somewhat close, I'll keep looking & likely run the #'s. Other than that, I don't really use the Rules of Thumb (ROT) too much when analyzing a deal. I do, however, use several calculators to analyze cash flow and estimate expenses.
My goal is to generate meaningful cash flow AND respectable ROI (cash on cash). I've definitely analyzed some deals with good CoC returns that would result in relatively low cash flow, and I've usually opted to pass on those so as to not tie up capital that I could deploy elsehwere.
I'm in the middle of a BRRRR on a 13-unit apartment building (eventually 17-unit) in SoCal. I believe the BRRRR strategy offers the best returns in most zip codes today. By increasing rents AND property value, I'll be able to have good cash flow AND a high CoC return (since I'll be able to pull most of my capital back out during the Refi step). After I pull my capital back out, I'll redeploy it to another property (hopefully another BRRRR...while existing properties continue to make $$), with the eventual goal of scaling into larger properties and replacing W2 income with passive REI income.
-Tom
I don't understand all the love behind the 1% rule. So many other metrics I would use first before even using that guideline. I found a gem of a property (6 units) that had no rents raises in about 9 yrs. It fell under the so called 1% rule by about a .25%. So I saw the upside potential immediately. Six months after I purchased the property, I have almost all the rents raised to market value with laundry income as well. By the end of the year, I'll be at 1.2%.
Had I just used the 1% rule to look for a property, I would have missed out on this. Because of my new higher AGI, I've added quite a bit now to the equity.
I'm with you - I don't have a lot of love for it either, BUT...I think it's a ROT (use at own peril) to help quickly analyze a deal. And like all calculations, the adage "garbage in, garbage out" applies. When I use the 1% rule, I do so with the rent #'s I think the market will bear (as opposed to current rents).
So if, for instance (#'s all theoretical) I'm looking at a 4-plex listed at $800,000... If I think each unit will rent for $800, I'm less than half of the way to the "1% rule" & I'm probably not going to waste my time with this listing.
- $800,000 x 1% = $8,000
- 4x $800 = $3,200 / mo gross rent
- $3,200 is less than half of $8,000
Of course if that $800,000 listing were significantly overpriced, maybe it's still worth looking...
Durham, NC · Member since 2014 · 104 posts · 68 votes
8y
I think it is all about perspective of what each investor's goals are and their background. For me personally, I am ok with $100/door cashflow, as I have all of my properties on 15-year notes Thus, for me, part of my "Cash flow" is that whopping amount of equity I am paying down each month compared to the neglibile amount I would be paying down if I was on a 30-year note. Thus, if I can make $100/door cashflow on a property with a 15-year note, that is the equivalent for me of making $400/door cashflow on a 30-year note. I don't believe in the notion that if you build equity up you are losing money because it is just tied up and not working for you.
The whole goal (at least my goal) is to get all of my properties paid off in the next 15 years (first one comes off the books in 11 years), then I will own almost 30 properties free and clear. I have no desire to keep getting bigger and bigger or acquiring more and more. I want life to become simpler and less complicated as I age, not more. Eventually I might even sell all of my properties and get into being a hard money lender/note holder. Now, I also have a W2 day job that I make close to $150,000/year at, so that has been my springboard for getting loans, acquiring property quicker, and being able to do full scale rehabs on my buy-and-holds with just the cashflow and income I have coming in from the rentals and my main day job. If I didn't have this salaried job, I can see where you would want much more than $100/door cash flow, but I don't think you would be doing just real estate investing exclusively if you were just starting out (at least i hope you wouldn't be). So, I don't think $100/month cash flow is necessarily bad, it just has to be looked at in terms of the overall financial big picture.
Charlotte, NC · Member since 2016 · 82 posts · 41 votes
8y
I see a lot of people on this thread use the cash-on-cash return metric. Is that the most common one to use? I've seen articles going over the importance of the IRR and total return. Do some of you use those along with the COC?
I will be ready for the next recession to grab up cheap houses for cash again when all the over-leveraged investors implode...
Why will leveraged investors implode if/when there's a recession? Is that automatic?
We always know WHAT will happen with investing, so yes, leveraged investors will implode when there's a recession and this implosion is automatic.
What we don't know is WHEN this will happen. This month? Next year? Next century? Mr. Market gets his jollies by keeping us humans in suspense.
I, and many other investors I know, have lived through more than one recession, with debt, and haven't imploded yet. It isn't the debt that makes the implosion (if at all), it's the low cash flow that offers no buffer.
I agree that when the cashflow can support the debt payments, the state of the economy is not relevant.
When debt has to be called in by the bank (or a brokerage firm has to issue a margin call) because the prices of the assets securing the debt have declined sharply, the owners of those assets need to raise cash quickly and become motivated sellers in a buyers market. For every seller of an asset, there has to be a buyer on the other side of the transaction. Price is determined by the side of the transaction that has the greater urgency to make sure the deal gets done (Rise of the Superrich Hits a Sobering Wall).
Regardless of why a distressed asset is for sale (the owner can't make the payments or the owner has to sell quickly), someone waiting on the sideline with cash has the opportunity to scoop up a bargain.
Why would a bank call a note due, if the payments are being made?...and if the property is cash flow positive, the payments should be made.
Ever heard of Dave Ramsey? He had millions in debt called on his rentals when he was in his early twenties. Lost it all.
He had certain kind of loans that were short term that's what caught him. If you have a regular loan you shouldn't have that problem. However with that being said, you can get yourself in a bind if you are max out on your equity on all your properties.
That's a great story but all of my loans state in the contract that they can be called within 90 days. They are a mix of full and non recourse loans.
I’d recommend a percentage of rents as a metric instead of a standard $$$ per door. It factors in differences in the economic area as $100/door is completely different for a unit renting at $500 as compared to a unit renting at $1,500.
I don’t have experience to know what level of cash flow would be conservative enough to last a recession, but I look for deals to be around 30% of rent assuming good front end numbers. This can be hard to achieve at this time too though.
So you're saying you would rather make 30% return and get $100/month instead of 20% return and get $200/month? That makes no sense. The lower the cash flow, the closer you are to negative cash flow.
