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 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.
Buying equity, using your own money, isn't making progress. It's just a cash transfer from your bank to the property. It equals the same thing in both places. The difference is, in the bank, it's liquid and can be invested. In equity, it's dead.
Now, equity that is paid for by the tenant (rent) is different. That's not coming out of your bank account.
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.
Buying equity, using your own money, isn't making progress. It's just a cash transfer from your bank to the property. It equals the same thing in both places. The difference is, in the bank, it's liquid and can be invested. In equity, it's dead.
Now, equity that is paid for by the tenant (rent) is different. That's not coming out of your bank account.
I am ok with dead equity. It means my debt load is going down. It's not always about making more and more and more in returns and such (for me at least). Sometimes life needs to be simplified as it gets too crazy and hectic. Me maxing out my 401K and Roth IRA contributions each year are my "non dead equity" plays. I want my real estate paid off and the deader the equity, the better, since that means the debt on each property is going down. For me, no risk/no hassle/dead equity is better that more risk and more hassle (ie, buying more properties, shifting more money, more investing etc), but to each their own.
Minneapolis, MN · Member since 2017 · 353 posts · 223 votes
8y
@Joe Villeneuve I'm not sure if you misread my post. The 30% return has nothing to do with the overall return on the property, it is a goal for the cashflow I would like to try and get on a property.
If you read my posts, I have been saying $100/door is too little. Instead of getting $100/door cashflow on a $1,200/mo rental, I would like to get closer to 30% of gross rents which would be $360/mo in cashflow. It is the complete opposite of what you are saying. It is getting harder to find now, but I like looking at the cashflow piece as a percentage of gross rents as opposed to a certain $$$ per door.
Discussing a certain $$$ per door means nothing on here as people are investing in completely different markets. As my post said, $100/door cashflow is completely different on a unit renting for $500/mo than a unit renting for $1,500. $100 on a $500/mo property is 20% of rent where as $100 on a $1,500/mo property is only 6.67%. The lower the cashflow, the harder it will be to manage the next downturn. Even if someone has equity, they will not be able to get access to it if the property does not provide sufficiant cash flow.
Real Estate Agent · Cranberry Twp · Member since 2017 · 384 posts · 198 votes
8y
Most of my owners in Pittsburgh average $200-$300/door for their investments. Some more, some less. I personally haven't heard too much about an amount per door. It is more often then not CAP rates.
Don't forget all the "hidden" costs of investment too like vacancy rates, management fees, capex, etc. Let us know if we can be of any help!
Pittsburgh, PA · Member since 2016 · 140 posts · 119 votes
8y
There is no "one-size-fits-all" financial rule/plan for anyone, there are only general proven/unproven guidlines (like "spend less than you earn, and invest the difference to get wealthy") to be researched and manipulated to fit your circumstances. Anyone who tells you differently is either selling you something or uneducated, maybe both. For that reason, I don't subscribe to the $100 cashflow/door rule (For reference, I define cashflow as the money left over after ALL expenses, including financing, taxes,mx, capex, management, etc. literally, the money that goes into my pocket after any and all associated short- and long-term expenses are paid out), it is merely a guideline, and unproven at that.
Like any other investment, real estate investment is a risk, so you need to ensure you are earning a return that is commensurate with the risk you are taking by employing your capital in this particular investment versus other investments of similar risk. The risk associated with your investment is based on several factors such as your own personal net worth/liquid funds (ex: If you are dumping your life savings of $50k into your first rental and it goes south, then that would ruin you vs. if someone like Robert Kiyosaki lost $50k on an investment), your age/timeline, other available income sources, opportunity cost of investing your non-monetary resources such as time and sweat equity (ex. time it takes to find, analyze, secure a deal, then the the sweat equity involved in rehabbing a rental unit yourself vs. paying someone else to do it because your time is better spent earning money in other ways) etc.
Based on those factors, you need to evaluate investments, real estate included, in terms of similar risk/reward potential, and see where you fall with regard to those in terms of ROI. If your market only supports a 6% ROI on rentals right now, but the historical return of the stock market is 12%, maybe it makes more sense for you to throw that chunk of capital into a high-dividend paying index fund instead of investing in a rental at this time. Or maybe you need to find another market that is providing high enough returns to justify the time, money, energy, etc spent in putting together a deal relative to your personal risk tolerance and the oppertunity cost of devoting your resources to RE vs other investment opportunities.
There is no easy "one-size-fits-all" answer, there is only self-evaluation, self-education, and subsequent well-informed decision making. Good luck!