Doing the math: Cashflow, Reserves, Mortgage

Starting Out
7yFollow

Doing the math: Cashflow, Reserves, Mortgage

Jim Truman
Member since 2018 · 52 posts · 12 votes

Hello,

I'm running the numbers on properties and planning to purchase one over the next year if we can find the right deal. I want to make sure I'm properly calculating cash flow when comparing properties and talking with other investors.  

I read other investors on these forums making statements like they never purchase anything that cash flows less than $500/mo. This seems almost impossible to me unless I'm buying dumps and completely rehabbing the place.  

Take properties on Roofstock for example. Using the numbers they use for estimating expenses, property management, mortgage, insurance, and reserves, I can sometimes find a property that cash flows $500 or $800 per year. No way I'm finding homes that cash flow that much per month.

So I'd like to confirm, when other investors mention cash flow, are they always including ALL expenses, including set asides for reserves? Are they typically paying cash or 20% down? Of course I can cash flow if I pay cash but it seems most investors prefer paying the minimum down.  

I'm find waiting until I find the right deal but I want to make sure I understand what others really mean when they throw these cash flow numbers around.  

Thanks

0Reply
29 views

Most Popular Reply

Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y

Every property is different, every market is different, everyones goals are different.

I'll take a property that has zero cash flow after PITI if it is the right asset, location, market etc. Other properties I wouldnt touch if they cash flowed 1,000 a month.

Yield (the cash flow a property throws off unleveraged, or a dividend stock throws off in a dividend, or a coupon on a bond) is a measure of the risk of the asset and or market.  So these properties that throw off tons and tons and tons of cash flow...are high high risk properties.  A low risk asset in a low risk market, might throw off no cash flow at all if it is leveraged, and might be cash flow negative if it is highly leveraged.  

None is better than the other.  They are different properties, they are different risk factors, and they serve different investors needs, and risk tolerances.  You need to decide both on your personal goals, as well as your risk tolerance.  Many always say they want cash flow...but they dont take the risk of the asset or market into consideration.  

[email protected]301-893-4635Podcast Guest on Show #192
District Invest Group546 Reviews
WebsiteView Page
3Reply
See this reply in the discussion

12 Replies

Jump to latestLatest
  • Kevin Barnard
    Rental Property Investor · Los Angeles · Member since 2018 · 45 posts · 50 votes
    7y

    Bigger pockets offers a calculator to use 5 times for free. Unlimited times with a pro membership . It can be found here 

    https://www.biggerpockets.com/buy-and-hold-calcula...

    Here is a link to running some numbers 

    https://www.youtube.com/watch?v=T_7vhsSBi7c

    I personally have purchased properties using $115 per door on small multifamily . I use 8% vacancy for that area in calculations ( I have yet to have a vacancy ) I save 5% for normally repairs , 10 % for Capital expenses pay 8% for management. My profit numbers of $115 a door are after all debt, liability, repairs and reserves. I put 25% down . Ends up being a 7% coc return before tax benefits . The rents are below market and profits will go up and debt will go down. It all depends on what you are comfortable with . Sure I'd love to 20%+ returns and I'm sure I will as I become a more advanced investor . For now I'm happy to have closed on 3 more doors rather than waiting for the perfect deal on paper. Hope this helps a little 

    3Reply
  • Kevin Barnard
    Rental Property Investor · Los Angeles · Member since 2018 · 45 posts · 50 votes
    7y

    Here is the Bigger Pockets Calculator for above mentioned deal 

    0Reply
  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y

    Thanks Kevin. You found a place that, after repairs, cost 225 and rents for 2550/mo. That's great. Do you mind telling me where you invest? Seems like many people tell me the 1% rule isn't really practical in most locations. Even the Realtor I talked to in Atlanta, which is supposed to be a pretty decent market, said shooting for .08% is more realistic and even that can be tough. 

    So I'm doing the numbers right, just have to find the right deal.  

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Every property is different, every market is different, everyones goals are different.

    I'll take a property that has zero cash flow after PITI if it is the right asset, location, market etc. Other properties I wouldnt touch if they cash flowed 1,000 a month.

    Yield (the cash flow a property throws off unleveraged, or a dividend stock throws off in a dividend, or a coupon on a bond) is a measure of the risk of the asset and or market.  So these properties that throw off tons and tons and tons of cash flow...are high high risk properties.  A low risk asset in a low risk market, might throw off no cash flow at all if it is leveraged, and might be cash flow negative if it is highly leveraged.  

    None is better than the other.  They are different properties, they are different risk factors, and they serve different investors needs, and risk tolerances.  You need to decide both on your personal goals, as well as your risk tolerance.  Many always say they want cash flow...but they dont take the risk of the asset or market into consideration.  

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group546 Reviews
    WebsiteView Page
    3Reply
  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y

    @Russell Brazil Thanks for the reply. After posting this question I found another thread, that I didn't find earlier by searching, asking about minimum acceptable cash flow. I'm sure you get sick of answering the same questions!

    I understand every property is different and every investor's goals are different. I just wanted to make sure I'm talking apples to apples with people when discussing cash flow. I wasn't sure if everyone included all their maintenance reserves in their calculation.

    After reading that other thread I think it's clear that the biggest discrepancy is whether the investor pays cash. Some of the guys won't get out of bed for less than $500/door per mo. But it turns out they're paying cash. Anyone can find a deal that cash flows if they pay cash. I'm not interested in tying that much money up in a single property.

    I am not looking for any current income. I want these homes paid off when I retire so they can help fund my retirement. I only want enough income to cover any expenses related to the property. So understanding that is my goal, technically a property that cash flows nothing after setting aside reserves could be an ok investment. But I also don't want to buy bad deals just because I don't currently need the income. 

    Based on what I'm reading, and understanding my goals, I'm thinking if I can find a house in a B market that will rent to quality tenants, costs <$150,000, low maintenance, good schools, and cash flows at least $100 after conservative estimates for maintenance, capex, property management, etc, that might be a good deal. This is with 20-25% down.

    2Reply
  • Heshel Mangel
    Member since 2018 · 208 posts · 90 votes
    7y

    @Jim Truman There are a couple of way people are getting that cashflow on a monthly basis. Either by buying under market value, and adding value through renovations, by paying cash for the property, or self managing. 

    If you are buying a property on Roofstock, chances are 1) You are paying full market value for the property, with no opportunity to add value yourself 2) You are buying the retail property with a traditional mortgage 3) You are an OOS investor who will need to pay for a Property Manager. 

    That is why you aren't finding higher cash-flow deals. Buying a property at full retail value (on Roofstock), the cashflow you are gonna get is hopefully just enough to cover all your expenses and leave a reserve for when bad things happen, at the same time, the rent is paying down your loan so after 30 years you have a free-and-clear asset. 

    1Reply
  • Sophia Coleman
    Real Estate Broker · Chicago, IL · Member since 2019 · 23 posts · 10 votes
    7y

    @Kevin Barnard Hi Kevin, I’ve been seeing Per Door mentioned a lot reading these Forums. Exactly what does that mean?

    0Reply
  • Jason G.Pro Member
    Rental Property Investor · Long Island, NY · Member since 2015 · 434 posts · 495 votes
    7y
    Originally posted by @Heshel Mangel:

    @Jim Truman There are a couple of way people are getting that cashflow on a monthly basis. Either by buying under market value, and adding value through renovations, by paying cash for the property, or self managing. 

    If you are buying a property on Roofstock, chances are 1) You are paying full market value for the property, with no opportunity to add value yourself 2) You are buying the retail property with a traditional mortgage 3) You are an OOS investor who will need to pay for a Property Manager. 

    That is why you aren't finding higher cash-flow deals. Buying a property at full retail value (on Roofstock), the cashflow you are gonna get is hopefully just enough to cover all your expenses and leave a reserve for when bad things happen, at the same time, the rent is paying down your loan so after 30 years you have a free-and-clear asset. 

    As a side note, if there are market increases in rent then cashflow may increase over time if it outpaces increases in taxes and insurance.

    0Reply
  • Heshel Mangel
    Member since 2018 · 208 posts · 90 votes
    7y
    Originally posted by @Sophia Coleman:

    @Kevin Barnard Hi Kevin, I’ve been seeing Per Door mentioned a lot reading these Forums. Exactly what does that mean?

     That means that if someone is targeting "$200 per door", they if they buy a 4-plex, they will want a total $800 cash flow every month. Per door is just another way of saying per unit. 

    0Reply
  • Sophia Coleman
    Real Estate Broker · Chicago, IL · Member since 2019 · 23 posts · 10 votes
    7y

    @Heshel Mangel Thank you!

    1Reply
  • Jim Truman
    OP
    Member since 2018 · 52 posts · 12 votes
    7y

    @Hershel Mangel you're correct. As a busy professional in the DC area I can't afford to invest here so it'll be out of state, and I also don't have the time/desire to renovate properties. So I'm looking for out of state, good condition, property management, with enough cash flow to make it a good deal. I don't think paying cash makes a lot of sense so with 25% down, I want to make sure I'm not ignoring deals because people on bigger pockets would say they don't cash flow enough but also not getting into a deal that seasoned investors wouldn't consider a good deal. 

    1Reply
  • Heshel Mangel
    Member since 2018 · 208 posts · 90 votes
    7y
    Originally posted by @Jim Truman:

    @Hershel Mangel you're correct. As a busy professional in the DC area I can't afford to invest here so it'll be out of state, and I also don't have the time/desire to renovate properties. So I'm looking for out of state, good condition, property management, with enough cash flow to make it a good deal. I don't think paying cash makes a lot of sense so with 25% down, I want to make sure I'm not ignoring deals because people on bigger pockets would say they don't cash flow enough but also not getting into a deal that seasoned investors wouldn't consider a good deal. 

    Jim, at the end of the day, only you can decide what is a good deal *for you*. You have goals, and if a deal gets you closer to that goal, it is good for you. Don't worry about everyone else. If you're goal is to have free and clear assets in 30 yrs for retirement, then as long as you aren't cash flow negative it's a good deal. Just make sure to leave some breathing space for reserves and future down payments. 

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free