Investor · Long Island, NY · Member since 2019 · 50 posts · 22 votes
As I build up my SFR portfolio I am starting to ask myself: "Is the idea of SFR cashflow simply a spreadsheet myth?"
The common "goal" for SFR investing is $200+/month in cashflow, i.e. cash leftover after PITI and all expenses/reserves. This sounds great on paper, and when you get paid out by your property manager each month all is right and good in the world.
In reality, each of these houses have several "time bombs" just waiting to go off, namely roof & HVAC replacement. Build up enough SFR's in your portfolio and you're destined to be replacing one or more of these components each year. It is a mathematical certainty, as these components age out over different timelines across the portfolio. In 2 years, I have bought 7 houses, 8 doors total- and have now unexpectedly had to replace 2 HVAC units.
So for arguments sake, let’s say I’m making $200/month in spreadsheet cashflow on a given house after expenses/reserves, and reserving $75 each month for capex expense. I get a call from my property manager saying the HVAC died and it’ll be $6,000 to replace it. I bought the house 1 year ago, so best case scenario I have $900 saved for this time bomb.
Assuming $200/month “cashflow”, it would take 2+ years to make up for the difference, meaning this house is cashflow negative for the next 2+ years.
Now, I have cashflow and capex reserves from the other houses in my portfolio that can theoretically cover this expense. But when analyzing my portfolio, I have to assess each house independently to identity outperformers/laggards.
But since this will continue to happen - time bombs knocking out cashflow for 2+ years at a time, I’m questioning whether my portfolio is cashflow positive at all at this point. And will it ever be in the future?
Is all this “cashflow” showing on my spreadsheets simply a figment of my imagination?
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
You need to switch to properties that are…
Less than 20-30 years old
Have stucco siding and tile roofs
Don’t have tornadoes, hurricanes, snow storms, earthquakes
Have very low property taxes
Don’t have state income taxes
Have very cheap insurance
I have an average repair budget of under 2% of rent, average vacancy of less than 2%, insurance is 3%, property tax is 5%, capex is less than 1%. Income tax is of course 0%. If you can keep all your expenses under 15% of rent it’s a lot easier. I don’t see how you do that with an 80 year old home, with high taxes and insurance in tornado alley or on the hurricane coast.
But to really answer your question. When I started I didn’t care that they cashflowed $100-$200. Because if you need that cashflow you went ready to invest in real estate yet. As you pointed out with your ac example, which could be a roof if you have shingles, or siding if you don’t have stucco. But 20 years later costs have risen 40-50% while rents have way more than doubled. Now $1,000/door is more common and still with just 5% yearly appreciation that’s worth hundreds of thousand more than the cashflow, per property.
Don't use todays numbers, use 5-10 years from now number. Can you imagine investing your first years contributions to an ira and seeing you earned $155 and saying "I'm not doing that any more, it just isn't worth it." Ps. If you treat them like a retirement plan instead of immediate income you lead in to the "your ira doesn't cashflow and yet you invest in it argument." And you could easily argue real estate has better tax advantages than an IRA.
Just keep at it. There is truly no easier way for the average American to get ahead.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
4y
No, it's not a myth. It's just hard to find these days. That's why many investors have turned to larger multifamilies, because then you're only competing with other investors. When you're buying a single family you're competing with owner occupants, who can pay a lot more than you because they do not need cash flow.
Investor · Long Island, NY · Member since 2019 · 50 posts · 22 votes
4y
@Taylor L. My question was more theoretical and not tied to any current investing opportunities.
By any measure, my portfolio is comprised of "cashflowing" properties that are well over the 1% rule and hit all the common ROI targets (on paper) you'll see mentioned on BP.
And yet when I look at my portfolio holistically, I am seeing houses that are cashflow negative for years to come due to major capex-related expenses.
Contractor · Brooklyn, NY · Member since 2021 · 64 posts · 57 votes
4y
@Dan Hertler if you're cash flow negative then how are you hitting your ROI targets? Cash flow is possible but for an average investor, it is very difficult for returns to benchmark. Revenue (rents) have not caught up to the value of homes OR, what I believe, value of homes have outpaced rents. Neither scenario is a suitable environment for investment.
Investor · Wilmington, NC · Member since 2016 · 211 posts · 262 votes
4y
Cashflow is what's left over after you factor in repairs, capital expenditures, vacancy, property management, principal, interest, taxes, insurance.
So it sounds like your not running numbers correctly - underestimating CAPEX which leads to over estimating cash flow. Cashflow is not a myth, the deal is made on the purchase and rent to make the numbers work. If you purchase too high or the rent isn't enough to leave left over after above mentioned expenses then you are correct, it doesn't cash flow.
Contractor · Brooklyn, NY · Member since 2021 · 64 posts · 57 votes
4y
@Dan Hertler You'll have to start including capex into your ROI calculations before purchasing a property. Or you can apply a discount rate to your total capex in accordance to when you forecast the expenses.
Investor · Long Island, NY · Member since 2019 · 50 posts · 22 votes
4y
@William Walker Just curious, what do you run your capex reserves at? For my houses, I run about $75/month for capex in my model, which is usually around 6 to 7% of gross rent (usually in the $1200-1300 range in my area).
This is exactly my point though, even if I ran capex at 10% of gross rent, a $6k expense to replace HVAC in the first few years of ownership will take years to recover from, cashflow wise.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
You need to switch to properties that are…
Less than 20-30 years old
Have stucco siding and tile roofs
Don’t have tornadoes, hurricanes, snow storms, earthquakes
Have very low property taxes
Don’t have state income taxes
Have very cheap insurance
I have an average repair budget of under 2% of rent, average vacancy of less than 2%, insurance is 3%, property tax is 5%, capex is less than 1%. Income tax is of course 0%. If you can keep all your expenses under 15% of rent it’s a lot easier. I don’t see how you do that with an 80 year old home, with high taxes and insurance in tornado alley or on the hurricane coast.
But to really answer your question. When I started I didn’t care that they cashflowed $100-$200. Because if you need that cashflow you went ready to invest in real estate yet. As you pointed out with your ac example, which could be a roof if you have shingles, or siding if you don’t have stucco. But 20 years later costs have risen 40-50% while rents have way more than doubled. Now $1,000/door is more common and still with just 5% yearly appreciation that’s worth hundreds of thousand more than the cashflow, per property.
Don't use todays numbers, use 5-10 years from now number. Can you imagine investing your first years contributions to an ira and seeing you earned $155 and saying "I'm not doing that any more, it just isn't worth it." Ps. If you treat them like a retirement plan instead of immediate income you lead in to the "your ira doesn't cashflow and yet you invest in it argument." And you could easily argue real estate has better tax advantages than an IRA.
Just keep at it. There is truly no easier way for the average American to get ahead.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
No it's not a myth, but if your goal is a minimum of $200/month, you're starting out with negative CF just waiting to happen. You probably need at least $300-350/month or all those "bombs" you mentioned WILL turn your idea of CF to a myth.
Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
4y
Your problem is budgeting $75 a month for capex. On a 1000 sqft SFH you should at least budget 200 a month for future capex if you are a buy and hold forever investor. This is such a delusion most people that invest in SFH has and I think it stems from bad BP educators. I mainly invest in SFH because I think the appreciation and total return over the next 5 years is better than MF and it's actually less complicated but I know it doesn't cash flow AT ALL and it's ok, I'm building long term wealth not cash flow.
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
I agree with others that you're not allowing enough for CapEx....plus $200 mo is not nearly enough return. And when you add in the appreciation, it makes the end result look a lot prettier....20 years from now, you will not be having this conversation. Patience is the key.
Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
4y
It's not a myth, this problem exists in all RE investing. Too many people are bad at analyzing RE. A percentage for maintenance/capex is stupid and inaccurate. you put a flat $75/month for what reason? How'd you derive that #?
Also most people are bad at managing their property or at managing their property manager.
@Syed H. I’m curious why you say a percentage for cap ex/maintenance is stupid? I’m a newbie so that’s why I’m asking. I always hear the “Cap ex of 10% rule” but have yet to hear any alternatives. Aside from the obvious setting aside a flat amount, is there another/better rule of thumb to follow?
@Syed H. I’m curious why you say a percentage for cap ex/maintenance is stupid? I’m a newbie so that’s why I’m asking. I always hear the “Cap ex of 10% rule” but have yet to hear any alternatives. Aside from the obvious setting aside a flat amount, is there another/better rule of thumb to follow?
I’ll answer. If you need plumbing replaced does your plumber charge you based on a % of rent? They don’t care if it rents for 800 or 1600. They charge what plumbers charge for labor and material to replace plumbing. If new plumbing last 40 years you can back out what capex is for replacing plumbing per month. Repeat for all components
I'll give you a prime example of why you can't use % to calculate capital expenditure costs. I own 2 homes in the same city. They are almost identical in sq. ft. One has a current market value of 250k and rents for $1500 (I bought for $134K years ago). The other has a current market value of 120k and rents for $950 (I bought for $87k).
If the AC goes out in one, it costs the same to replace the AC in the other. Costs the same to put on a new roof. Costs the same to put in new flooring.
As much as I get tired of reading @Joe Villeneuve saying % is a lie and will mislead you, he is correct in this regard. You need to look at each individual property, how old it is, what major repairs have been done and when, and what it will cost to do major repairs. You should look at HVAC, roof, flooring, and appliances. Siding if appropriate.
@Syed H. I’m curious why you say a percentage for cap ex/maintenance is stupid? I’m a newbie so that’s why I’m asking. I always hear the “Cap ex of 10% rule” but have yet to hear any alternatives. Aside from the obvious setting aside a flat amount, is there another/better rule of thumb to follow?
I’ll answer. If you need plumbing replaced does your plumber charge you based on a % of rent? They don’t care if it rents for 800 or 1600. They charge what plumbers charge for labor and material to replace plumbing. If new plumbing last 40 years you can back out what capex is for replacing plumbing per month. Repeat for all components
I second this one. Look at the property when you buy it to see what the estimated shelf life will be for major items like roof, HVAC, floors, Kitchen, driveway, etc... What you will need is enough money to cover that expense from some source when the time comes to address it. It can come from cash, or (my pref) a LOC (not tied to the property).
The alternative is a proactive method (my pref).Let's say you have roof that needs to be replaced within the next 5 years. Replace it when you buy, and it's free. Here's how:
1 - New roof cost about $5k. 2 - If you pay for it while you own it, it's a cost to you since it comes out of your pocket in the form of cash, that you have to recover before you make a profit. 3 - If you bury it in the original financing when you buy, (Terms - 4.5%, 30y am), it will add $25/m or $300/y. 4 - If you sell the property in 5 years, your cost (in lost CF), is only $1500. 5 - Now, when you list the property for sale, and declare a new roof only 5 years old, do you think you can get at least a $1500 increase in your sale price?...or more?
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
4y
If SFH cash flow is a myth, then I'm probably at least Poseidon by now (I won't be so arrogant to suggest Zeus :D ). My entire RE investing career was made with SFHs. Where I would suggest you are probably going wrong:
1. Paying too much from the outset. You have to have a good handle on what your hold time will likely be and what capex will need to be done in that time period, and be sure you price it accordingly when buying. That's tough in today's market but not impossible.
2. Not rehabbing fully at the beginning. If your HVAC system is 25 years old, you should expect it's probably not going to last much longer even if it works now. If you do a full rehab on the front end, much of your capex disappears for a decent amount of time. Old galvanized plumbing lines might have to be replaced, but the replacement PEX or copper is likely to last 40-60 years. ETC.
3. Not including the principal reduction & tax benefits in your "flow". If you buy a property for 100% cash, it's virtually impossible not to cash flow, so I assume you are financing everything. If you are getting $200 cash in your account on each house, and each house is mortgaged for say $100k, you're likely adding another $100+ in principal reduction and maybe $100-150 in tax benefits. That's part of your return, even if you don't calculate it.
4. Expecting oversized returns on a short timeline. REI is a slow moving train. You make more and more money over time. Rents go up, houses appreciate, your indebtedness decreases. At the beginning, if you have nothing to work with - which is just about true if you *can't* pay all cash for a property (and I'm not saying you *should* pay all cash, just that you don't have the resources to do it), you should expect your returns to be paltry.
New to Real Estate · San Antonio, TX · Member since 2018 · 28 posts · 7 votes
4y
@Dan Hertler I’m concerned, how are you inspections going before buying the house? I feel like those kind of fixes can be estimated when getting a house inspected and appraised. knowing when a new water heater was put in or when a roof was replaced, these all have life expectancies and yes accidents happen but if this is happening on a regular basis for you, like I said, I have concerns.
If SFH cash flow is a myth, then I'm probably at least Poseidon by now (I won't be so arrogant to suggest Zeus :D ). My entire RE investing career was made with SFHs. Where I would suggest you are probably going wrong:
1. Paying too much from the outset. You have to have a good handle on what your hold time will likely be and what capex will need to be done in that time period, and be sure you price it accordingly when buying. That's tough in today's market but not impossible.
2. Not rehabbing fully at the beginning. If your HVAC system is 25 years old, you should expect it's probably not going to last much longer even if it works now. If you do a full rehab on the front end, much of your capex disappears for a decent amount of time. Old galvanized plumbing lines might have to be replaced, but the replacement PEX or copper is likely to last 40-60 years. ETC.
3. Not including the principal reduction & tax benefits in your "flow". If you buy a property for 100% cash, it's virtually impossible not to cash flow, so I assume you are financing everything. If you are getting $200 cash in your account on each house, and each house is mortgaged for say $100k, you're likely adding another $100+ in principal reduction and maybe $100-150 in tax benefits. That's part of your return, even if you don't calculate it.
4. Expecting oversized returns on a short timeline. REI is a slow moving train. You make more and more money over time. Rents go up, houses appreciate, your indebtedness decreases. At the beginning, if you have nothing to work with - which is just about true if you *can't* pay all cash for a property (and I'm not saying you *should* pay all cash, just that you don't have the resources to do it), you should expect your returns to be paltry.
I agree, except for #2. The higher CF you get when you pay all cash from the start is an illusion as far as returns go. In order to make a profit, you must first recover all of your cost. When you buy a property, the only cost a REI pays is the cash out of pocket.
So, when they pay $100k in cash for a $100k property they are paying the full price for that property. The cost to the REI is $100k and they must recover $100k in CF before they can count any profit. If their CF was $10k a year, then it would take them 10 years to recover their cost...and then start making a profit.
Now, if a different REI bought that same property, but only put 20% DP ($20k), that property only cost them $20k (the rest is paid for by the tenant). If the loan pmt was $5k/yr, then the DR would be only $5k/yr...half of what the other investor was getting. However, if this REI only paid $20k, it would only take them 4 years to recover their cost, and for the next 6 years would be making $5k profit/yr...totalling $30k. Take it a step further. If this REI had the same $100k to start, that $100k would buy this REI 5 of the same property. That's $500k in PV, and $25k/y in CF.
Now, if both REI started, and used, the same $100k. The first REI had twice the CF/yr per property as the second REI, but the 2nd REI actually had 2.5 times the TOTAL CF/yr as the 1st REI. This means after 10 years, the 1st REI was at a break even point in profit and had $100k in PV. The 2nd REI made $150k in profit and had $500k in PV. The option of paying all cash doesn't really give you higher CF.
They both started with the same $100k...and they both had the same $100k in equity (both paid for it the same) at the start. However, if all the properties gained the same appreciation, say 5%/yr, that would mean that the 1st REI would have gained $5k in PV/equity after the 2nd year, while the 2nd REI would have gained $25k in both PV and equity.
IF you start with the same $100k in cash, spent it all, and look at this from the perspective of percentages, you would have the following: 100% equity vs 20% equity from the start, the 20% equity gives you a better profit, total PV and CF.
1 - Cash flow that is 10% of the PV vs 5% of the PV, the 5% of the PV is greater than the 10%. 2 - 80% debt vs 0% debt, the PV is greater for the 80% debt.
Rental Property Investor · Chicago, IL · Member since 2019 · 203 posts · 119 votes
4y
Dan,
we buy SFR properties that usually require gut rehabs. When you fix everything like hvac and other essentials at the beginning of the purchase, you give yourself a few years without significant rehab. We can save money during this time.
Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes
4y
@Dan Hertler - I'm in the camp of saying Yes, it's a myth. $100-$300/month cash flow produces $1200-$3600 cashflow with everything going perfectly. There's no margin for error on timing the turnover, let alone getting a tenant who causes excessive damage or needs to be evicted.
I feel like over a short time horizon you can show positive cash flow, but the longer you own that house, the greater the chances of 1-2 incidents occurring that wipes out years of "profit".
In my opinion, SFR strengths are in easy management while you wait for the home to appreciate. You just barely try to break even while you wait for your chance to exit after the house has doubled in value. Or now you just convert it into a STR and enjoy the cash flow of a 10+ unit building
Rental Property Investor · Knightdale, NC · Member since 2018 · 24 posts · 16 votes
4y
i personally look at SFH as a collection of what it'll bring because often cashflow isn't the only variable. Yes cashflow is nice and everyone wants it but in my case it's one slice of the overall picture. Its a balance and for me some of my properties cashflow, hold equity/wedge positions or mostly tax shelter for my W2 job. To each their own. Cashflow isn't a myth you just have to out work the next person, be able to find deals and create value adds to create better said widen that gap.
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
4y
This is a long game and the market is dynamic in the short term. The long term trend is clear, upward. Cashflow is a derived number and can be manipulated. What is the cashflow of a building I own free and clear and have deferred maintenance vs a renovated house I have leveraged at 80%? There is more to the picture than one number. I generally stay clear of derived and theoretical numbers, vacancy, cap ex, reserves, cash on cash, cost to turn, maintenance and so on. I use numbers I can quantify, purchase, renovation costs, actual rent, tax, PITI, property management, principle pay down. I follow the KISS method. Keep it simple stupid!
Taxes should always be considered. Tax is a real number, it can be qualified and there is a time line associated with it, the fiscal year. Taxes, insurance, depreciation, maintenance and interest are all deductible. All of those line items are on sale 1/3 to 1/2 off depending on the rest of the individuals taxes.
I know it is a common accounting practice and a spread sheet requirement, but the idea of saving for Capex never made sense to me. What if I bought a building and held it for 5 years and saved for cap ex every month, kept the money in a savings account at .05% and inflation ran at 3%. First, the inflation would eat my lunch. If at the end of the 5 years of holding, I did not replace the A/C or roof, no cap ex. How is that money accounted for? It was actually cashflow, there is no cashflow look back.
Short of natural disaster and fire, there are very few surprises when it comes to the building, you can anticipate the expenses. You are doing well if get 20 years on a roof, 15 on an A/C. If you have older buildings and equipment, you are going to have expenses. I have a duplex with A/C units that are 20 years old and I may not like it, but I know they are going to fail. I will pay cash or put them on a credit card, depending where I am in my funding and build cycle. I do not have a rainy day fund for every building I own. I have operating capital and it is always moving. I do not let it sit on the sidelines. In any given month (year) a property may be unprofitable, but as long as the overall portfolio is performing I am satisfied.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
4y
Cash flow on leveraged C class properties is a myth. Cash flow on a paid of A class property is steady as she goes. When your cash flow is 200/month any repair throws it off. When it is 2000 per month, you easily absorb those things. Now can you make money on the C class rentals? Maybe. I operated a bunch of them over several years and the mortgage pay down plus appreciation made a tidy return. But I wouldn't depend on the cash flow to buy groceries.
Having said that, on a large enough portfolio you should be able to average things out to a more predictable cash flow. But thats with 10-20 SFRs at least.
