Is SFR Cashflow a Myth?

General Real Estate Investing
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Is SFR Cashflow a Myth?

Dan Hertler
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?

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Bill B.
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. 

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  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    It is a myth. Lots of realtors and gurus lie to you but single families for the most part don't cashflow in 2022 atleast. Lots of people think they are cashflowing but aren't really calculating out those time bombs and occasional bad tenants, etc. The few areas I have seen single families work is higher rent ones for example $2200 rents, etc. as the time bombs can get eaten up by such high rents but you need a decent ammount of capital in the deal. 

    Multi units tend to work a lot better and can easily cashflow after all actual costs. Just jump up to a 4 unit. It's still a fixed 30 year loan and the numbers work a lot better then single families. 

    1Reply
  • Frank McGovern
    Rental Property Investor · Chicago, IL · Member since 2021 · 32 posts · 32 votes
    4y

    Check out this blog post here on BP, specifically the table provided. This is very useful to determine CapEx costs.

    CapEx: An Investor's Guide to Capital Expenditures (biggerpockets.com)

    0Reply
  • Billy Smith
    Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes
    4y

    I would /will only buy a S.F.H in A ,B areas only do all the rehab up front .I have contacts to help in the rehab plus my own knowledge can get the job done on a tight budget .Then I fire it up start the rent I keep all my SFH in tight area . I am ready to buy a S.F.H near a property I own I am thinking a discount of 25% to 30%.I figure mortgage around $1100 to $1200 rent close to $1800 .



     



     

    0Reply
  • Sonja Sevcik
    Member since 2020 · 11 posts · 9 votes
    4y

    I have owned single family homes since 2006. All have been profitable except the first! The one I over-spent for in 2006! Ha! I was just scrubbing/analyzing my 2021 returns on real estate portfolio investments and I can't complain except for the dead cat that I keep around to reduce taxes due on the other assets. What's funny is my parents kinda sold me on this deal when I wanted my 1st purchase to be much smaller and more conservative. So family emotions are involved in it too! That makes it hard to sell. Oh the lessons learned. Last year was my biggest cap ex year ever. New carpet/flooring, paint, fix-its, a new drive-way and landscaping updates, and quite a few appliances over the portfolio. I do own two condos - - those are nice. Big depreciation expense but lower future cap ex. overall. Plus, I like to get on the HOA boards and that's fun, too. I've never had to replace an AC. Someday I will. But one thing I'm very careful about is looking at ACs, Roofs, and Plumbing main lines before buying. I've backed out of deals due to roofs and ACs/Heating if I didn't like the inspection report info. I would find yourself a better inspector and bake these things into your deals or walk away. The great thing about real estate is that there is always another deal tomorrow.

    0Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    4y
    Originally posted by @Joe Villeneuve:
    Originally posted by @Account Closed:
    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. 

    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.

    I do agree with you in that clearly your capital investment should make a decent cash profit after paying all expenses. However a paid for rental does that more easily than a highly leveraged one. And a paid off property has the higher cashflow (but lower ROC). If it is truly income to live on that you are searching for, then paid off rentals beat leveraged rentals for an equal amount of cash flow (but with lower ROC). 

    1Reply
  • 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.

    I do agree with you in that clearly your capital investment should make a decent cash profit after paying all expenses. However a paid for rental does that more easily than a highly leveraged one. And a paid off property has the higher cashflow (but lower ROC). If it is truly income to live on that you are searching for, then paid off rentals beat leveraged rentals for an equal amount of cash flow (but with lower ROC). 

     Not necessarily.  

    Example:  $100k properties; $10k CF/Yr with no debt;  $5k CF/Yr with debt (20% DP = $20k)

    NO Debt Option - 
    Paid in Cash $100k
    # of Properties = 1
    Total CF = $10k/yr
    Yrs to recover cost = 10
    Cash Profit after 10 years = 0
    Total PV = $100k
    Total Equity = $100k

    20% Down Payment Option - 
    Paid Cash $20k
    # of properties = 5
    Total CF = $25k
    Yrs to recover cost = 4
    Cash Profit after 10 years = $150k
    Total PV = $500k
    Total Equity = $100k

    0Reply
  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    4y
    Originally posted by @Joe Villeneuve:

    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.

    I do agree with you in that clearly your capital investment should make a decent cash profit after paying all expenses. However a paid for rental does that more easily than a highly leveraged one. And a paid off property has the higher cashflow (but lower ROC). If it is truly income to live on that you are searching for, then paid off rentals beat leveraged rentals for an equal amount of cash flow (but with lower ROC). 

     Not necessarily.  

    Example:  $100k properties; $10k CF/Yr with no debt;  $5k CF/Yr with debt (20% DP = $20k)

    NO Debt Option - 
    Paid in Cash $100k
    # of Properties = 1
    Total CF = $10k/yr
    Yrs to recover cost = 10
    Cash Profit after 10 years = 0
    Total PV = $100k
    Total Equity = $100k

    20% Down Payment Option - 
    Paid Cash $20k
    # of properties = 5
    Total CF = $25k
    Yrs to recover cost = 4
    Cash Profit after 10 years = $150k
    Total PV = $500k
    Total Equity = $100k

    Well, of course a property that's yielding 10% CF (before debt costs) will do much better with leverage! 🤣🤣 When the DSCR is less than half what a property is yielding, then yeah, gotta leverage to the hilt! That bring us to the next issue...where can we find that property that is actually going to yield 10% (and not just on paper).

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Originally posted by @Tony Kim:
    Originally posted by @Joe Villeneuve:

    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.

    I do agree with you in that clearly your capital investment should make a decent cash profit after paying all expenses. However a paid for rental does that more easily than a highly leveraged one. And a paid off property has the higher cashflow (but lower ROC). If it is truly income to live on that you are searching for, then paid off rentals beat leveraged rentals for an equal amount of cash flow (but with lower ROC). 

     Not necessarily.  

    Example:  $100k properties; $10k CF/Yr with no debt;  $5k CF/Yr with debt (20% DP = $20k)

    NO Debt Option - 
    Paid in Cash $100k
    # of Properties = 1
    Total CF = $10k/yr
    Yrs to recover cost = 10
    Cash Profit after 10 years = 0
    Total PV = $100k
    Total Equity = $100k

    20% Down Payment Option - 
    Paid Cash $20k
    # of properties = 5
    Total CF = $25k
    Yrs to recover cost = 4
    Cash Profit after 10 years = $150k
    Total PV = $500k
    Total Equity = $100k

    Well, of course a property that's yielding 10% CF (before debt costs) will do much better with leverage! 🤣🤣 When the DSCR is less than half what a property is yielding, then yeah, gotta leverage to the hilt! That bring us to the next issue...where can we find that property that is actually going to yield 10% (and not just on paper).

     All over the United States.

    0Reply
  • Max Bondar
    Member since 2024 · 1 post · 0 votes
    2y

    This is dumb. I was trying to get a rent estimate and it leads me to this page?! Waste of time.

    0Reply
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