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?

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.

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?

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.

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 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.

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.

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.

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.

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.

Is SFR Cashflow a Myth?

Account Closed

Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes

4y

Originally posted by @Joe Villeneuve:

Originally posted by @JD Martin:

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.

So you are saying that when United airlines buys a 300M dollar aircraft, they only make a profit when profit on that plane alone exceeds 300M? That is not how business accounting is done. You depreciate the cost over the life of the asset. Except in housing the value of the asset actually can increase over time. What you are talking about is payback time which is less important if the asset holds or increases its value over time. For a truly depreciating asset like a car or truck or plane it makes sense.

3 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

Originally posted by @Account Closed:

Originally posted by @Joe Villeneuve:

Originally posted by @JD Martin:

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.

So you are saying that when United airlines buys a 300M dollar aircraft, they only make a profit when profit on that plane alone exceeds 300M? That is not how business accounting is done. You depreciate the cost over the life of the asset. Except in housing the value of the asset actually can increase over time. What you are talking about is payback time which is less important if the asset holds or increases its value over time. For a truly depreciating asset like a car or truck or plane it makes sense.

...and that's how companies that look great on paper, go out of business. Their paper assets, on their paper accounting, can't pay the bills because they lack the paper to pay them. When their vendors and employees want to get paid, they can't take a scissors and cut out a piece of the paper those assets are written on, and use that to pay them.

Real profit is tangible, not virtual. You can run all the accounting definitions in the world at me, but in the end the only profit that keeps a business afloat is liquid. Those other assets you mentioned, and include them as profit, are only profit when they become tangible.

Your plane example doesn't fly. If the cost of that plane doesn't generate its own self sustaining income, then they get rid of the plane. When the cost of an employee isn't recovered by that employee's work, then that employee is gone, or at least placed where their cost is self sustaining.

Every property is (or should be as) its own separate self sustaining business, much like Little Caesars has many businesses under that corporate name. When a business isn't holding its own, they are either fixed, or gone. They are not allowed to be a drain on the other successful businesses in that corporation.

Cash is what a business uses to sustain itself. It's the lifeblood of every business. It's the most important profit because without it, any other virtual profit really doesn't exist...yet.

1 Reply

John Brodeur

Investor · Philadelphia Metro · Member since 2019 · 44 posts · 75 votes

4y

@Lesley Resnick, this works very well in an up market. Rent increases, and appreciation happening year over year. What ends up making this strategy riskier is if there is an overall market downturn, or a slide in rental price increases, or decreases is rent (ask folks who bought in Detriot in 1999 what happened in 2008 to 2010). What happens at this time is if you have major cap ex happen at a time that coincides with a downturn your working capital might dry up. This is why lenders, professional investors, and folks underwriting deal preach having reserves. There are creative ways to make those reserves work for you, but they act as an insurance policy for major expenses. And ideally you run the numbers of what these major expenses are likely to be (roof life expectancy, major systems, hvac, plumbing, siding, brick maintenance etc.) And then either set aside that amount in reserves plus extra for vacancies up front or budget for them on a monthly basis. Not factoring in these items in your analysis "hides" your actual return as these expenses will come up eventually.

Also the benefit of scaling your portfolio, as it looks like you are doing is that it makes these expenses more predictable. Alot harder to know exactly when a single roof will fail, but if you have 30 properties you'll start to see these expenses with a level of regularity that makes it easier to budget for.

1 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

Originally posted by @John Brodeur:

@Lesley Resnick, this works very well in an up market. Rent increases, and appreciation happening year over year. What ends up making this strategy riskier is if there is an overall market downturn, or a slide in rental price increases, or decreases is rent (ask folks who bought in Detriot in 1999 what happened in 2008 to 2010). What happens at this time is if you have major cap ex happen at a time that coincides with a downturn your working capital might dry up. This is why lenders, professional investors, and folks underwriting deal preach having reserves. There are creative ways to make those reserves work for you, but they act as an insurance policy for major expenses. And ideally you run the numbers of what these major expenses are likely to be (roof life expectancy, major systems, hvac, plumbing, siding, brick maintenance etc.) And then either set aside that amount in reserves plus extra for vacancies up front or budget for them on a monthly basis. Not factoring in these items in your analysis "hides" your actual return as these expenses will come up eventually.

Also the benefit of scaling your portfolio, as it looks like you are doing is that it makes these expenses more predictable. Alot harder to know exactly when a single roof will fail, but if you have 30 properties you'll start to see these expenses with a level of regularity that makes it easier to budget for.

Detroit is a bad example for this question. It's a great example for REI's not analyzing markets correctly, rationalizing their weak analysis, and then chasing that "shiny object of distraction". Not the same thing as what this discussion is based on.

0 Reply

Sam YinPro Member

Los Angeles, CA · Member since 2021 · 584 posts · 738 votes

4y

@Michael Ablan well said, DITTO. some people make it work for a while, but eventually, a major capex comes along. I use SFR as a seed to grow into multifamily, where the unit numbers can help absorb costs.

But, back to the main question, NO, it's not a myth. The ability to meet those standards are TOTALLY based on underwriting. It should happen immediately at COE if your goal is to hit that 200-300 cash flow. If the underwriting doesn't show it will happen, then dont buy it. Go look for another.

For those that say it's not possible because they tried and have had to settle for less, it's because they settle for less. If your goal is to get a certain reasonable outcome, then hunt for it.

However, with that said, there is nothing wrong with getting less. There is more to REI than just cash flow alone. Some do not want to invest in speculation, but I think every investor has to make that judgement call based on their own knowledge and experience.

I just feel there are too many properties out there that can meet those numbers. It just people are not opening up their search area.

1 Reply

John Brodeur

Investor · Philadelphia Metro · Member since 2019 · 44 posts · 75 votes

4y

@Joe Villeneuve , I used Detroit as a decline in rents. Agree that Detroit is a unique case that has a ton of other factors at play.

I was simply using the example that the spreadsheet math often works within the context that many BP investors have seen (myself included in my REI investing journey). If you've bought within the last 12 years you have likely only seen increasing rents and appreciation. Increasing rents and appreciation can paper over risky strategies like not carrying enough reserves to cover major expected expenses.

I agree that many poorly capitalized firms end up going out of business when credit dries up, their working capital suffers a short term decline, and they don't have enough cash to weather the storm.

When the tide goes out many will be stranded or caught without their swim trunks at least. Lol

0 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

4y

Originally posted by @Dan Hertler:

@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).

SFR cash-flow isn't a myth but cash-flow with a PM is. Funny how your cap ex % is roughly the cost of a volume discount PM. Mine is 8.25%, no fill or renew fees.

Half my portfolio is managed. I waited until I was full preservation stage and glad I did. I swear their job is to touch your property every week. No service call triage, just send someone over.

Wealth in SFR isn't the skinny cash-flow as you know. The cash-flow is lunch money. Equity capture and appreciation are 15x. If you're breaking even with a PM in the sfr space, consider yourself lucky.

5 Reply

Dan Hertler

OP

Investor · Long Island, NY · Member since 2019 · 50 posts · 22 votes

4y

@Bill Brandt where is this magical land where no natural disasters exist?! I’m guessing by your mention of stucco and tile, somewhere out in the desert?

I agree with your assessment and it’s a mindset shift for me. Long-term, everything will likely be fine, just a painful pill to swallow after only owning for 1 year and believing I had more time on this particular HVAC

2 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

@Lesley Resnick Has some great points and an outside-the-box look at this. I agree, generally speaking.

0 Reply

Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

4y

@Dan Hertler If you're constantly getting hit with "time bombs" you need to reconsider your due diligence and underwriting.

I understand the question but this is a silly example. How can you buy a property without knowing the age of the HVAC? If the age of the HVAC is near the end of its useful life you need to budget for this when you underwrite. You can either assume higher reserves for years 1-3 (or until the HVAC goes), adjust the purchase price or receive seller credit. Of course surprises will always come, but you can limit the damage.

0 Reply

Shawn Pottschmidt

Rental Property Investor · South Bend, IN · Member since 2016 · 74 posts · 29 votes

4y

We should all be hoarding cash and building a war chest. 25k to cover 5 properties. Roof or furnace failure makes me squirm a bit but a cash reserve helps me sleep at night.

2 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

Originally posted by @Shawn Pottschmidt:

We should all be hoarding cash and building a war chest. 25k to cover 5 properties. Roof or furnace failure makes me squirm a bit but a cash reserve helps me sleep at night.

Hoarding cash and keeping it where?

1 Reply

Brandt Fanion

Real Estate Agent · Orlando, FL · Member since 2015 · 28 posts · 13 votes

4y

This is exactly why so many investors are turning to short term rentals. The capex expenses are basically the same, but your cashflow can be substantially better.

1 Reply

Brian G.

Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes

4y

@Dan Hertler I will only invest in LTRs in a place where there is good reason to believe that rents will increase over time and property values will rise. If you lock in your costs in a market where rents will rise you will be golden. My $.02

1 Reply

Chris LumLee

Investor · Honolulu, HI · Member since 2017 · 187 posts · 108 votes

4y

@Dan Hertler Here for the discussion. But I did liquidate my SFRs recently for this very reason.

1 Reply

Zee Abbas

Contractor · Brooklyn, NY · Member since 2021 · 64 posts · 57 votes

4y

@Account Closed, determining when you will break even should be a metric every investor keeps an eye on. If F500 are basing investment decisions of off it, I should too.

1 Reply

Account Closed

Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes

4y

Originally posted by @Zee Abbas:

@Account Closed United definitely does the calculation to determine when their plane purchase will pay out- in fact payout time is likely one of their top driving metrics these days due to airlines being cash poor. I agree with @Joe Villeneuve, determining when you will break even should be a metric every investor keeps an eye on. If F500 are basing investment decisions of off it, I should too.

Joe completely ignores the concept of a balance sheet. The cost of an airplane is accounted for by depreciating it over its lifetime. And it maintains value on the balance sheet until it depreciates to zero (after which it still has actual residual value). But yes, payback period is considered by business for any investment and I stated that myself.

Any business runs on profit/loss income statement (very important) but also balance sheet (assets/liabilities). In Joes model, there is infinite leverage and therefore unlimited liability. The house is always an asset on your balance sheet and can be converted to its cash value by sale. So it is not as useless as Joe would have you believe. Companies also use strong balance sheets to raise debt and equity and acquisitions.

2 Reply

Joe Kim

Rental Property Investor · SF Bay Area, CA · Member since 2014 · 352 posts · 543 votes

4y

you have to be actually making $500+ cash flow just to break even when disasters hit, with vacancy, turnover costs, eviction, huge capex cost. Even if you took account for all these factors, one major bad tenant can wipe your "cash flow" away.

I made money on every single real estate deal (nearly all SFR) in the last 9 years in more than 10 properties.

#1 due to appreciation - which last 10 years was the greatest appreciation anyone has ever seen in REI (am I wrong?)

#2 Switching to Airbnb/STR - but this is a PURELY active business, NOT passive at all.

Biggest myths

#1 Cash flow matters most or appreciation is not important. Cash flow only matters to keep you afloat before you sell the property (unless you do furnished rental or airbnb or hugely successful at the BRRRR method).

#2 REI is passive....haha what a joke. You can only make real money if you have like 5+ doors or doing a much more active -"add value" plays like BRRR, airbnb/STR, add wholesaling. All of that takes a TON of work and commitment. Nothing is for free.

Real MONEY is made in VOLUME (scale) or add-value plays. Or you get lucky and buy during the BEST appreciating markets in the history of real estate.

Better to be lucky than good as they say!

1 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

Joe completely ignores the concept of a balance sheet. The cost of an airplane is accounted for by depreciating it over its lifetime. And it maintains value on the balance sheet until it depreciates to zero (after which it still has actual residual value). But yes, payback period is considered by business for any investment and I stated that myself.

Any business runs on profit/loss income statement (very important) but also balance sheet (assets/liabilities). In Joes model, there is infinite leverage and therefore unlimited liability. The house is always an asset on your balance sheet and can be converted to its cash value by sale. So it is not as useless as Joe would have you believe. Companies also use strong balance sheets to raise debt and equity and acquisitions.

I'm not ignoring the balance sheet. I'm putting it all in the proper perspective. I'm taking that balance sheet, and applying it to the real world to show how there is a difference between the accounting world and the real world. I let the accountants live in the world of forms and paper wins and loses. You can rationalize wins any way you want and make it all seem as though you are successful because your "balance sheet" says you are, and end up out of business because the real world says you can't stay in business because you can't pay your bills. If you can't stay in business, that "paper" profit you say I'm ignoring will disappear as if it never existed.

I've never said there was infinite leverage. I've made mention many times that my examples are not meant to show that the success is based on actually having as many loans as I show when the compounding effect takes over. Those examples are to show how achieving an exponential return instead of a linear return is better. Try focusing on the growth in dollars rather than the growth in number of properties. I've stated many times I'm not suggesting a REI should have 100 loans out. How about just changing from SFH to MFH, or commercial, or any other REI where the increase in dollars buys you a property with larger RE value...not larger number of properties.

0 Reply

Jasmine Willois

Dallas · Member since 2018 · 18 posts · 12 votes

4y

All I can say is that is a real question, as an economics major, I thought long and hard about this and actually maintained a small portfolio of rentals myself in IN and MS. (SFRs) In the end, I chose to go with note investing. Those margins are too slippery for me, but they are real and doable.

0 Reply

Julian Wyer

Real Estate Agent · Sacramento Metropolitan Area · Member since 2022 · 19 posts · 8 votes

4y

@Dan Hertler the podcast shows repeatedly talk about fixing those kinds of things from the beginning, otherwise something will always be breaking down and a 5k HVAC sets your cash flow back for a long time.

0 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

4y

CAPEX doesn't care what percentage you allocated or how long you have owned the property. CAPEX doesn't occur on a predictable schedule.

What I have observed over time is that CAPEX is unpredictable. You can have one AC unit that lasts 12 years and another lasts 40 years. You can have one property that goes ten years without any major expenses and another can incur multiple within a two year period.

Many factors determine CAPEX, but here are three major ones:
1. Age/condition of major items when you acquire. If you buy an old property that hasn't been updated, expect more capital expenditures.
2. Owner preventative maintenance. If you are not properly maintaining the property, things will fail faster.
3. Tenant quality and care of property. If you have C or D class tenants, they will be harder on the property than A or B class tenants. The is the fallacy of buying cheap houses that cash flow. Your expense ratio is higher than buying A class houses with lower cash flow.

At some point you will reach a statistical average cost, but it will take way more than 8 properties. Keep in mind that many properties are acquired with deferred updates. The first thing I do when I purchase a property is fix everything that is broken. That often requires replacing or updating some items like outlets, faucets, have furnace cleaned, clean AC coils, new appliances, paint the property, etc. I incur these costs day one, so that the property is in better condition while I own it. You would probably need 50 or 100 houses before you reached a more stable statistical CAPEX number.

Another caution on the analysis side is make sure you are setting the right expectations. In your analysis, you are expecting a 25 year item (HVAC) to be paid for in one year of CAPEX reserves. You paid $6000 and over 25 years that works out to $20 a month. The point is, you are accruing for CAPEX and without seed money in the fund, of course you will not enough to cover early year capital expenses. Your CAPEX account may go negative before it goes positive. Look at the average across all properties. I can also assure you that two HVAC failing this year, doesn't mean two next year. It could be zero or it could be six.

The problem is not that cash flow is a myth, but rather an issue with how you are allocating CAPEX. We have learned over time to acquire quality assets to reduce expenses.

0 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

4y

Quote from @Julian Wyer:

@Dan Hertler the podcast shows repeatedly talk about fixing those kinds of things from the beginning, otherwise something will always be breaking down and a 5k HVAC sets your cash flow back for a long time.

You have to be a little careful with this strategy. I have had inspectors tell me that my 30 year old HVAC is at the end of life when I buy a property. Some would recommend replacing it proactively, but why incur an expense if something is working? I have had roofs, water heaters and HVAC last 40 years, so why rip them out at year 25 or 30? I could be giving up as much as 25% of the remaining life. I actually have more repair calls for newer HVAC than I do for older units. That is due to complexity of newer systems introduced by efficiency and safety enhancements.

2 Reply

Luka Milicevic

Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes

4y

If I could find a TRUE cash flowing property in my market that cash flows $200/month after all expenses and reserves I would sell my car, wedding ring, cash in my children's 529s, sell one of my kidneys and buy everything I could.

With a 20% down payment conventional at 20yr am I can barely break even with just PITI right now. (In my market).

To answer the actual question though, I don't think it's a myth at all. You have to factor it over the course of a LONG time. 20 years or so. For example, I have one property that I have owned for 4 years and have had zero vacancy, zero repairs, zero cap ex....but those expenses WILL come at some point. I have also owned one for 7 years that has had zero vacancy and a total of $1500 in repairs. You front loaded your capex expenses to the first year of ownership, the same way in my two examples my capex is on the back end. So when you average it out over the course of a long time, it balances out.

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Joel Scarboro

Rental Property Investor · Knightdale, NC · Member since 2018 · 24 posts · 16 votes

4y

So this has steam rolled a bit. Final note from me I BRRRR and have a property manager. One of my homes which used to be a marital house brings in just over $100 a month when it's all said done but has tax incentives which makes it still a viable keep. However this along with the remainder of my properties have extensive equity and cash flow or both. So the overall average is significantly high. And as for vacancies I haven't had any but I've had one repair to a backed up toilet from the total of my portfolio. So location, price point of acquisition , property management, quality of renovation( bulletproofing) and not getting caught up on what people think are market rents keeps your places full. To each their own but in my case I listen and if it can be applied to make my portfolio more efficient I'm in. However this isn't the case with this. Don't get caught up in the noise your variables are what dictates your lane.

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Is SFR Cashflow a Myth?

Is SFR Cashflow a Myth?

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