New Investor: If a deal is not making $200/unit is it worth it?

6 Replies

First time investor. My goal is cash flow.

In Brandon Turners real estate book he said we should aim for deals that are 80% of asking and making a minimum of $200 per unit in cash flow after all expenses.

In the inspection phase of a deal on a fourplex and the estimated renovations are getting closer to $200k (will do another post on that). The increase renovations cost could potentially take my cash flow down to $150.

If I’m no longer making $200 per unit is that a bad deal?

Asking price should generally be considered a random number, a better base line is fair market value. If you can buy a property at 80% FMV (in other words, the seller is gifting you 20% equity) you are definitly doing fantastic!

The issue I see with cashflow calculations is that your projected cash flow is only as good as your assumptions. If you tweak a few variables just slightly combined they will change the entire calculation. You can take a good deal and show that it is negative cash flow and vice versa. This is the part where experience comes in.

$200 per door net cash flow has been a solid bench mark here in Milwaukee. You could do much better, but usually at the expense of future capex, a classic rooky mistake.

While positive cash flow is the most important source of income for an investor, it is also the smallest. Wealth is not created with cash flow, but with equity, principal pay down and with appreciation, both forced and natural.

When you weigh different investments, after cash flow, always consider the equity potential next. Cashflow will improve over time; many of my early investments have turned from small cash flow to cash cows as rents have been increasing over time. 

When you look for an investment that is cash flow heavy, you usually sacrifice on the equity potential and the other way around. So in the end it depends on your current goals how you rrate an investment. 

Not necessarily. 

It all depends on what your personal goals are. The rules that are not a end all, be all, they are more of a genral rule to give you an idea of where you are headed. 

I am not sure exactly what your numbers look like but for me the only metric I care about it CoC (cash on cash). This is a ration between the amount of money i have in the deal (down pmt, rehab cost, etc) and the amount of yearly cashflow. I could be only getting 50 bucks a door but my CoC is 25%, then i might be okay with that.

That is just my personal outlook so take it with a grain of salt. In conclusion, don't let the textbook rules keep you from pursuing this deal. Compare it to your personal goals and if it makes sense for you, go for it. 

@Kim Hud

Well if you don't care about the CoC return you get and only care about the actual cash flow, then just put a higher down payment down to lower your debt service.

This will allow for more cashflow and should allow you to meet your CF goal. 

Nobody can decide if a deal is bad except for you. Is $600 per month worth the time you will be putting in to own and manage the property? Maybe. For us, no way. I need to see $400 per unit cashflow for a four unit property to make it worth my while. But we might have different goals than you have. You have to make the decision for yourself.