Cash Flow per Single Family Property

16 Replies

Greetings!

As a general rule how much should a single family property cash flow to make it a potential buy? I am familiar with the 50 percent rule often used on Multi Family properties. Is there a similar rule or guide for single family?

Thanks,

Jordan

Do you NEED the cash flow or do you want to maximize profitability?

The 50% rule still applies to single families.  Its probably a little pessimistic in a climate like @Bob Bowling's but its not too far off.   With SFRs, though, you have a LOT more variability.  One big repair, like my $6200 sewer line last year, can eat up a HUGH chunk of your rent for that property.   Or, you can get lucky and have nothing but taxes and insurance.  But over the long haul, for a portfolio of properties, it seems to work.

Then you have to cover any debt service from the remaining half.

If you self manage you can earn the PM's cut.  Around here they charge 10% of collected rent plus half to a full months rent to fill a vacancy.  So that works out to 14-18% with one turnover a year.  That's a nice chunk of change for very little work.

@Bob Bowling

The extra cash flow is great of course. However long term profitability is the overall objective. What would be your advice for each scenario?

Thanks

Jordan

@Jon Holdman

Thanks for the information. Many people pitch real estate as the ultimate retirement, passive income etc. However how much can you really live off that? Like you said sewer line or something cleans you out for the year.

Well, if you're in for the long term at some point you have them paid off and 50% (or more if you self manage) can go into your pocket. One or two rentals isn't going to have much effect, but 20, 30, or 50 certainly can. And, of course, how much you need depends on the lifestyle you want to live.

Originally posted by @Jordan Vires :
@Bob Bowling

The extra cash flow is great of course. However long term profitability is the overall objective. What would be your advice for each scenario?

Thanks

Jordan

I've NEVER bought a property that cash flowed initially. Not in the 70's or the 80's or the 90's or 00's. However each of these properties doubled in value in about two years and rent increases average 6-7% annually.

I believe you give up some profitability for cash immediate cash flow. And if you are giving up rent growth and appreciation where will you end up over your holding period? Let's say you buy a SFR at $100,000 that cash flows $100. Sounds good? To sell that property with a 6% Realtor com mission it will take FIVE years of cash flow to pay the Realtor. Still sound good?

My point is that you need to look at profitability over your holding period and you need to make an educated guess on TWO major factors, 1. Rent growth and 2. Appreciation. Yet so many investors don't use or understand these metrics. Thinking that cash flow is profit is foolish.

I would respectfully disagree with Bob. All my houses cash flow nicely and that cash flow has funded additional down payments for properties, vacations, and other non-necessities. So I would argue that cash flow (rent minus ALL expenses)does equal profit. I would never buy a house based solely on the expectation that it will appreciate in value or that the rents will rise dramatically from year to year. Now that is foolish.

Originally posted by @Albert Hasson :
I would respectfully disagree with Bob. All my houses cash flow nicely and that cash flow has funded additional down payments for properties, vacations, and other non-necessities. So I would argue that cash flow (rent minus ALL expenses)does equal profit. I would never buy a house based solely on the expectation that it will appreciate in value or that the rents will rise dramatically from year to year. Now that is foolish.

This is the ignorance I'm pointing out. ANY property can cash flow. A property that cash flows TODAY can stop cash flowing TOMORROW. You are buying on the EXPECTATION that rents/expenses stay the same without making a business plan that considers future rents/appreciation/expenses. THAT IS FOOLISH!

What you are arguing makes absolutely no sense at all.
Absense a dramatic collapse in rents (no modern historical precedent for that) or a dramatic rise in expenses (i.e. quadrupling of taxes, skyrocketing insurance rates, etc.) a house that cash flows today will cash flow tomorrow whether or not the value of the house rises or falls.
I'm also calling BS on all your properties doubling in value in 2 years, very unlikely.

IMHO guessing, and that's all it is, that rents will increase and that values will increase is a much risker guess that guessing everything will be the same five or 10 years down the road.  

If every property you bought has doubled in value in two years you have been incredibly luck.  I've owned or own only seven properties.  None doubled in value in two years during the time I owned them.  None have double in value while I owned them period.  According to zillow, for what that's worth, one did double in value and them some during the boom.  Another almost doubled in value between when I sold it in 1995 and when I last looked two years ago.  I'll claim that making any assumptions about appreciation or rent increase is nothing more than guessing.  Your good luck is wonderful for you, but irrelevant for others.

Originally posted by @Albert Hasson :
. I'm also calling BS on all your properties doubling in value in 2 years, very unlikely.

Of course you would because you are ignorant about rent growth and appreciation.

Look for your self.

http://www.honolulupropertytax.com/Search/GenericSearch.aspx?mode=ADDRESS

1978 Pualei Circle prices $30,000 $40,000 1980 price range $70-120,000

1986 Largest single family development in 94545 Palma Ceia Prices mid 80's 1988 prices $170,000

1994 Vegas, baby SFH 1500sf priced about $100,000. 1996 $200,000+

2003 Diamond Head Sands 3721 3731 3741 Kanaina Ave. one bedrooms $200,000. 2005 one bedrooms $400,000.

Four decades of price points that you can verify for yourself.

Mahalo

Actually Bob I cant verify anything because you provided no addresses so the link you sent is worthless. I did input 3721 Kanaina Ave and 3741 Kanaina Ave and it said such an address does not exist.
However, I will concede its theoretically possible for a particular property to double in two years. If all your four properties did that then congratulations. Of course, I would only be really impressed if you sold at the peak.
I have been investing for about 20 years and have bought and sold close to 75 properties and currently own 21 cash flowing SFH's. None have ever doubled in any time frame, ever.

The point I would like to make to all young investors or those that are doing this FOR A LIVING is DO NOT RELY ON APPRECIATION when making investing decisions.
That's exactly what millions of so called "investors" did in the mid 2000's and with rare exception they lost their investments to foreclosure or short sale, ruined their credit, and caused the worst recession since the Great Depression.

Of course, if you are so wealthy that shelling out cash each and every month on a property doesn't bother you then go ahead and gamble with the appreciation game but realize its nothing more than chance whether or not the property will appreciate in the short term.

Originally posted by @Albert Hasson :
Actually Bob I cant verify anything because you provided no addresses so the link you sent is worthless. I did input 3721 Kanaina Ave and 3741 Kanaina Ave and it said such an address does not exist. However, I will concede its theoretically possible for a particular property to double in two years. If all your four properties did that then congratulations. Of course, I would only be really impressed if you sold at the peak. I have been investing for about 20 years and have bought and sold close to 75 properties and currently own 21 cash flowing SFH's. None have ever doubled in any time frame, ever.
The point I would like to make to all young investors or those that are doing this FOR A LIVING is DO NOT RELY ON APPRECIATION when making investing decisions. That's exactly what millions of so called "investors" did in the mid 2000's and with rare exception they lost their investments to foreclosure or short sale, ruined their credit, and caused the worst recession since the Great Depression. Of course, if you are so wealthy that shelling out cash each and every month on a property doesn't bother you then go ahead and gamble with the appreciation game but realize its nothing more than chance whether or not the property will appreciate in the short term.

http://www.honolulupropertytax.com/Search/GenericSearch.aspx?mode=ADDRESS

Follow directions Number in first box, street name in second. Do not enter Ave Circle. Pualei Circle is 11 developments. Don't use number and only enter Pualei.

Originally posted by @Jon Holdman :

If every property you bought has doubled in value in two years you have been incredibly luck.

Yeah probably dumb luck every time I bought in all of the last 4 decades. I was a professional model so it probably has nothing to do with the research I did for the areas and the property types that I did. Foolish for me to take the time to ask what the properties sold for in prior years and make a graph showing the cycles that showed sold prices doubled in about 10 year cycles. And what was I thinking that if rents averaged 6-7% annual increased over 30 years that this wouldn't all stop when I bought because what? Oh, real estate is so 1988.

Bob, one cherry picked property in a specific market doesn't prove your point. Home value is inherently more volatile than cash flow on a given property on average.

Originally posted by @Steve B. :
Bob, one cherry picked property in a specific market doesn't prove your point. Home value is inherently more volatile than cash flow on a given property on average.

FOUR properties, in THREE different states over Four decades. That's a pretty big cherry bowl.

Geez. ALL I'm saying is do your own numbers with rent growth and appreciation. It is ignorant to NOT do this and think profitability is based only on a hundred dollars a door today. Do you invest? Do you KNOW what the rent growth and appreciation HAS been over the last 20-30 years?

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.