How is $100/month Profit Good?

Member since 2011 · 24 posts · 1 vote

I'm totally new to Real Estate Investing. But after reading so many times that $100 a month profit is the goal, I'm left wondering how can this be good? By my estimation I'd need 40-50 houses to make a decent living. I know I'm probably totally missing something, so can someone explain this to me. And how can someone get to own that many homes? And how long would this take? Just keep refinancing the previous loan? I would lose my head trying to keep track of that many homes even with a property management company!

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J ScottPro Member

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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

15y

It's only $100/month until your tenants pay off your mortgage, at which point it could be $500/month, $1000/month or even much more.

Many long-term investors buy several properties that have just a little cash-flow (again, about $100 or $200 per month), and then plan their retirement for when the properties are paid off -- 10, 15 or perhaps 30 years in the future, depending on how they structure and amortize their loans.

If you have 10 houses generating $1000 per month in 15 years, that can replace a typical corporate salary.

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Silver A.
Real Estate Investor · Select a State · Member since 2010 · 79 posts · 17 votes
15y
Hi Dan, welcome to the BP!

"But after reading so many times that $100 a month profit is the goal, I'm left wondering how can this be good?" Who, what, where has said that? It's the first time I read that.

I guess it can make sense when someone has a job with steady income, and then is investing in a rental to secure the retirement. The idea of earning 100$ by doing almost nothing (just managing the property) is not too bad then, since the tenant is paying for the owners loan every month, and the owner is not expecting quick cash from the deal. Calculating 100$ positive cash flow is a lot easier than trying to figure out ROI and/or other crazy and complex abbreviations.

To me it makes a lot more sense to figure out your long term investment goals and then work backwards from them to see, how they can be achieved.
If I just want to own a house free and clear in 30 years it might make sense to look for 100$ positive cashflow. It only takes a small down payment to start as well..
It's not a bad strategy by any means, but someone, who wants to live off their real estate investment sooner, say, in 3 years, needs a different plan. Or a lot more money in the beginning...
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
It's only $100/month until your tenants pay off your mortgage, at which point it could be $500/month, $1000/month or even much more.

Many long-term investors buy several properties that have just a little cash-flow (again, about $100 or $200 per month), and then plan their retirement for when the properties are paid off -- 10, 15 or perhaps 30 years in the future, depending on how they structure and amortize their loans.

If you have 10 houses generating $1000 per month in 15 years, that can replace a typical corporate salary.
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Ralph S.
Real Estate Investor · Sacramento, CA · Member since 2008 · 566 posts · 356 votes
15y
I'd need way over 100 units if income and shedding my W2 income were the goal. :goofy:

Think about it in broader terms. You'd not only have to replace your spendable income, (after tax, so start with your gross income), but then you'd have to replace your benefits, health insurance, contributions to IRA/401(k), etc. Then the number of units you would need grows considerably. You'd need 30 units just to cover the monthly health insurance premiums for a family of four (medical, dental, prescriptions).

The $100 per door is just one segment of the 50% Rule of Thumb. It is a quick and dirty method, if done accurately, to indicate whether or not the purchase price supports an investment likely to provide a positive cash flow over a long term holding period. There is nothing in that rule that you can take to the bank, and it's not a case where "your results may vary," it's a case where "your results WILL vary."

If you use the 2% and 50% rules of thumb in evaluating price (and there is a lot written here on BP), you'll find that all too often prices and "cash flow" in the retail market are defined as Rents less PITI, a very short term possibility, but a certain long term cash loser. And this is a prime reason why the majority of people who invest in real estate fail from the beginning by paying too much.

It only takes one bad tenant, a long vacancy, a roof, a furnace (you get the idea), to wipe out years of supposed cashflow at Rents - PITI.

If you're considering a buy and hold strategy, real estate is a very long term investment, and buying at a price that at best, suggests a positive cash flow is critical. But so it your ability to manage and sell that property.

After purchase comes the management of and eventual exit (sale). Your ability to be successful here is also a key consideration, IMO just as important as the purchase price rules of thumb. You can buy right, and stil fail.
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Dan Brindley
OP
Member since 2011 · 24 posts · 1 vote
15y
Got it J Scott. Thanks for the other answers, also.
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Jeffrey K.
Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
15y
I figure I need 200 units to meet my personal goals. The problem with 200 units is you have to hire more staff and then your goal turns into 250 units to pay for the extra person. If you have a partner you can double that to 400-500 units.

You are having a problem with units vs. houses. A house is one unit. You can also buy a building with 50 units in one place. Most of the guys who I know who have large portfolios pick big buildings so they dont have to have their repair guys running all over town all day. It is easy to just have a guy work at a big building all day.
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Greg B.
Homeowner · Burleson, TX · Member since 2008 · 756 posts · 376 votes
15y
I think the people who say that mean it as a baby step.

Most people are consumers and spend as much or more than they make. Most of what they spend their money on will inevitably devalue. The writer is probably trying to give the reader a mind change. Change from being a consumer and spending money on junk to being a producer and having your money make money.

It would be very hard to go from fiscally broke to large deals overnight. Most people couldn't digest the process. IMHO, the $100 a month is a baby step in the growing process.

Heck, many REI's don't even get $100/month on their first deals if they are telling the truth.

Good luck
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
15y
100 month cash flow is to thin for me.I like value add deals that increase appreciation and cash flow.
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Jeffrey K.
Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
15y
In my market it is very rare to find a $100/mo deal. With look at areas that have appreciated in the past and where we can make $50-75 a mo on a B building in an A location.
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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
15y
The goal ends up being quite personal, and unique to your situation. I know managers who want break even at best. How can this be, you say? Let's look at $100/month on taxable, reportable income. The cash flow on this property may be $250/month if the depreciation is $1,800/yr. This is typical for the 'starter' property in my area.

So how can $100/month be good? Answer: Good (tax deferred) cash flow and limited current tax liability works for member/managers making larger salaries and in a higher tax bracket.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
There is a ton of great advice and commentary in this thread already. The 50% rule of thumb gives a greatly warped sense of reality to me because it COMPLETELY IGNORES 3/4ths of the value centers of real estate. Tax advantages are real, especially with large incomes. Appreciation is real when you buy prudently in the right locations. Amortization of loans is real and builds thousands of dollars in our portfolio every month.

The "only getting $100/month" thing is hogwash. Cash flow is not the end-all-be-all item with investing. Many large fortunes have been built making zero or even negative cash flow while enjoying the other value centers while owning.
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Thorney Gibson
Engineer · Bel Air, MD · Member since 2009 · 136 posts · 24 votes
15y
This is a great topic. Multi points of views here to think about.
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Kevin C.
Investor · McKinney, TX · Member since 2009 · 405 posts · 160 votes
15y
I look at it in terms of number of free and clear units I'll need to generate the additional cash flow I'd like to have. Each unit being one single family home.

Using the 50% rule I'd have 50% of gross rent as cash flow (actually closer to 60% since I don't use a PM).

The rentals I currently own rent in the $1400 a month range, and any future units I picked up would most likely be in the $1200 to $1800 a month range.

4 or 5 of those, along with other investments will go a long way towards the income I'm looking to see in retirement.

I expect to retire with 0 debt, so my income needs in retirement will be much less than what I earn today.

I'd rather have 5 free and clear properties than 20 or 25 with considerable mortgages on them.

There are plenty of ways to hit your financial goals, leverage does not have to be a long term part of the puzzle.

Of course, current disposable income plays a huge part in one's investment strategy.

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Mitch Kronowit
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
The wealthiest real estate investors I know bought property in good locations and SAT ON THEM FOR A VERY LONG TIME. In California, real estate appreciates, especially near the coast. Those who think otherwise have only been in the game less than half a decade.

You can either purchase a few select properties here in SoCal and wait 20-30 years, suddenly waking up one day to find them paid off and worth 5 times what you purchased them for, or you can take the land baron approach and buy several hundred headaches in poor parts of the country making that $100/door amount to something.
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Dan Brindley
OP
Member since 2011 · 24 posts · 1 vote
15y
Originally posted by Kevin C.:
I look at it in terms of number of free and clear units I'll need to generate the additional cash flow I'd like to have. Each unit being one single family home.
Using the 50% rule I'd have 50% of gross rent as cash flow (actually closer to 60% since I don't use a PM).

The rentals I currently own rent in the $1400 a month range, and any future units I picked up would most likely be in the $1200 to $1800 a month range.

4 or 5 of those, along with other investments will go a long way towards the income I'm looking to see in retirement.

I expect to retire with 0 debt, so my income needs in retirement will be much less than what I earn today.

I'd rather have 5 free and clear properties than 20 or 25 with considerable mortgages on them.

There are plenty of ways to hit your financial goals, leverage does not have to be a long term part of the puzzle.

Of course, current disposable income plays a huge part in one's investment strategy.

Yeah, and I think I align my thinking a lot with yours. If I could have 4-5 houses getting 1,000-1,200 a month on each Id be happy. I can purchase a house that will allow me to do that every 3 years, without financing. So it would take me 12-15 years to do so. I don't know if I have the patience for it, though.
1 Reply
Robert Steele
Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
15y
A very interesting thread.

I won't even look at a property unless it will make $300/month cash flow on paper. This is Rent - PITI.

I have this argument about owning free and clear versus levered up with mortgages with my spouse and with a fellow investor friend. They like the feel good feeling of free and clear. They also like the fact that they can get closer to retirement with fewer properties. I like using leverage because that way inflation pays down my debt for me.
1 Reply
Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
15y
Originally posted by Dan Brindley:
... after reading so many times that $100 a month profit is the goal, I'm left wondering how can this be good? ...

What is also being missed is that you gain in wealth by virtue of the tenant paying the principal on the loan as part of the rent being received; that principal gain (equity) can't really be spent, but it does help to accumulate wealth. And as somebody already mentioned, once the house is paid off, then there is a much greater amount of the rent that becomes the cash flow to the landlord.

That is why there are some who advocate that break-even rentals are good for their investing goals (those people saying this are usually working a job that they are happy to keep while the houses are being paid down).

Your investing goals and monetary needs will be two of the factors you need to consider when figuring how much cash flow you need.
1 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
I wanted to bump this thread because I think it is a great topic. People that are mesmerized by the magical 50% rule are missing the boat IMO.
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Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
15y
Brtan, I believe the value of the 50% rule is in the idea that expenses will be 50% of rent so when PI exceeds that the investor should look closely at what will be coming up, i.e. new roof, furnace, siding, windows etc.

When I first started marketing apartments as a real estate agent an investor, after my presenting an apartment P&L, said if I was honest I would say that the expenses were 50% of rent. This was almost 30 yrs ago. I was surprised so tested it out and it proved true for me.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
I have no problem with using the 50 percent rule to ESTIMATE expenses IN THE LONG RUN. What I have a problem with is people thinking it is the sole thing to use when analyzing an investment opportunity. All of the other profit centers are real. People value "growth stocks" every day in the stock market and they don't get labeled as foolish for investing in them.
2 Reply
Rob Gillespie
Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
15y
I will probably be alone on this, but I think that is a very dangerous number! You will be heading to bankruptcy in a hurry with a bunch of homes cash flowing only 100 bucks per month! You need a lot more juice than that!
You are thinkin in the right direction, just gotta get properties that are home runs to keep as rentals. Figure half of your rent is goin to expenses before you make the mortgage payment. Consider the area for vacancy and damage. make sure you have long term money with a fixed rate.
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Tim B
Real Estate Consultant · Minneapolis · Member since 2009 · 60 posts · 8 votes
15y
The same folks that believe $100 a month is good also believe the "buy and hold strategy" always works. Sure when real estate was appreciating at 10% you could just sit on it and make money. Investors in small rental properties should carefully analyze their actual ROI (return on investment). How much time is involved in managing the property, legal/financial risk in renting in a litigious society and finally alternative investments for your hard earned dollars.

Those getting rich, involved in these investment strategies are book/seminar gurus. Flip houses - then bank the profits - leave rental properties to the pros.

If you really want to invest in rental property - buy a REIT.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by RobTheHouseGuy1:
You will be heading to bankruptcy in a hurry with a bunch of homes cash flowing only 100 bucks per month!

Why would positive cash flow drive anyone to bankruptcy (unless, of course, they didn't know how to manage cash flow, which is a key skill for all investors)?
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Implicit in all of these comments is the ASSUMPTION that people will live off of the proceeds, have no jobs, AND that they don't have liquidity elsewhere in their portfolio if things go wrong. This is a completely myopic viewpoint that does not account for THE BULK of the house-buying/investing universe.
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Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
15y
The difference seems to be the assumption that real estate may not go up but may come down. If there is sufficient cash flow it is hard to be hurt.

Appreciation used to be a given. Getting 1% was a good deal. A large broker and property owner used to say if you can get PITI and $50 you were good to go. If you wanted more you had to buy junk. Many became multimillionaires using this philosophy.

Counting on appreciation is aggressive but each to their own. Like you say Bryon, with cash reserves you can do things those without might think twice about.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Jeff Sielicky:

Counting on appreciation is aggressive but each to their own. Like you say Bryon, with cash reserves you can do things those without might think twice about.

I don't think you need to count on appreciation...you just need:

1. To count on the market not dropping out on rental rates (which hasn't happened even over the past 5 years);

2. To keep reasonable reserves;

3. To treat your investments as investments, and not personal cash flow vehicles;

4. To dollar-cost-average over several real estate cycles.

Anyone who had done that over any significant period of time in recent history -- regardless of the time period chosen -- would have fared very well.

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