From what I have gathered, if a potential investment doesn’t cash flow with 5% vacancy, repairs and cap ex then it should be a hard pass. We are looking at a property that MIGHT cash flow $50/month but I am also allotting 5% vacancy, 5% for repairs and 5% for cap ex which according to BP rental calculator will be roughly $700/month. Is the $8,400 that is set aside for the inevitable essentially cash flow for time being?
Thank you in advance
It really depends on your risk tolerance and your cash reserves for your investing. All those allotments are for "what ifs."
So, what if the furnace needs to be replaced "tomorrow?" Or, what if it breaks down in 10 years? What if you don't have a vacancy for a dozen years? Or, what if you can't rent it for 6 months?
Or put it another way... Lets say you own your own primary residence. Do you have a separate budget for capital expenses? What if the roof over your head needs to be replaced? What if you furnace or a/c needs to be replaced?
Does this make sense? All this allocation is trying to provide a buffer or margin. Just like your own home, you really don't want to be living too tightly...
I would not count that as cashflow as you will have expenses in the future that you need to cover. It would really depend on your goals such as how much you are looking to get in cash flow per month per door. Depending on the condition of the property if it is in good shape I normally do 5% repairs, 3% vacancy, and 5% cap ex.
What market are you looking in? Maybe the cash flow is a bit low, but you will make it up with appreciation.
I personally am only looking for cash flow, so I look into the midwest for rental properties. I get about 150 a door with a 4%/4% vacancy and repairs @ a 7-8% CoC, which isnt great but it got me started. This is through a turn key by the way, which included a new roof, HVAC and water tank.
I am now looking for properties they are a bit distressed or outdated so I can put in some work so I can achieve better returns. I feel a lot more comfortable doing this because I kinda understand how the process works now and I built relationships with property managers that I can rely on.