What cash flow returns does you guys look for?

24 Replies

Hey Everyone!

I'm working on getting educated and analyzing as many deals as I can as I'm trying to nail down which market I want to get into in the Raleigh area.

I'm curious what cash flow requirements you have for your properties in order to pursue the deal. What I've seen so far is the better deals on the Zillow, Realtor.com, etc are looking like they cash flow $130-170/month for both single and multi family. I'm looking in the $60-100k range.

I've seen the $200/month number thrown around a few times, is that what you generally shoot for? I guess if you are able to offer and end up for around a 10-20% discount that would help your cash flow increase as well.

I'm interested to hear what y'all think, especially anyone in Raleigh/Durham or Fayetteville!

Hey @Patrick Young and welcome! I'm just getting started as an investor here in Raleigh as well and just closed on my first deal. 

I generally look for the 1% deals (rental income = 1% of the purchase price). I find that this leaves room for mortgage payment, saving for all expenses/reserves, and cash flow of about $100/month. I don't worry so much about cash on cash returns.

You'll find that 1% deals are much easier to find in some markets of the Raleigh/Durham area than others. I know they can be found in Durham, but I don't really know the area well enough to feel comfortable investing there. There are also areas in east/south raleigh (Garner, Clayton, etc) where they can be found.

That's my 2 cents. I'd love to hear what others have to say!

Everyone has different feelings about this and I am in a very different market but $100-$200 per month is not worth my time. There's too much work investing to bother with that low of a return. I'm a very small time but my girlfriend and I agreed when we started investing that $1000 per month was the minimum we would accept. I have since learned that we are on the very high end of what most people are willing to accept. I'd probably settle for $800 but we will see what happens when the next deal comes around. 

Break even (using conservative underwriting) day one and growing at 4% or better each and every year after that along with prices increasing 5% or better (on average) after that. If you are in it for the long haul (which you should be as a buy-and-hold investor) then you should be looking at rent growth in addition to day one cash flow, and usually the neighborhoods with higher rent growth will have lower day one cash flow. Neighborhoods with higher rent growth will also tend to offer an easier tenant base to manage (more passive for you) and hold their value better in a downturn too. You can and should confirm all this by looking at the historical records for prices and rents in the neighborhoods you are considering over the last 10+ years, especially around 2009 & 2010.

Updated over 2 years ago

Also, to those that say this is too low of a return, consider the leverage ... 5% on average price increases leveraged 5-1 is a 25% return, not counting cash flow or mortgage amortization ... that, my friends, is how you build real wealth IMO.

Great information everyone, thank you for the responses.

@Alex Corvin Congrats on your first deal! That's good to hear, and definitely something that I should be focusing on more. The properties that I have liked so far have been around 1.1-1.3%, so they should be passing that test. I'm still working to find the area that works best for me, so the first step is trying to make sure that I am analyzing them correctly.

@Carl Carlson Wow, those are some great returns that your seeing! I think that may be a product of different markets. Our general rent range looks to be 750-1000/month, so I'm not sure how we could possibly look for a cash flow like that. Thank you!

@David Faulkner That's a very good point! Do you generally see that nicer neighborhoods = lower day one cash flow and higher rent growth? I have no interest in the sketchy, lower end areas even if it would result in greater profits. Can I look up records like that on places like Zillow and Trulia?

It's really which ever deal will get my money working the hardest and results in the quickest road to actual profit.  

Hey @Patrick Young - I agree with @Alex Corvin ... the 1% rule is what I glance at before deciding whether to continue with my analysis. I'm over here in Durham and in this market, if I can get $100/door, I'm usually bouncing the deal off my business partner to get their insight. If I can get $200/door, I'm bypassing my partner and starting to do some due diligence. If you purchase, in the right neighborhood you can also play the appreciation card.

In Raleigh, I don't look at anything less than $200 for THs. For SFHs, I've seen deals on the MLS in the $500 range, but they are rare.

Hey @Patrick Young . This is all really great advice you are receiving. BP is full of useful information. Another great source is, if you have not read it yet, I highly recommend Rental Property Investing by Brandon Turner. He talks lot about analyzing deals and how to stay away from the bad ones. As a novice investor, reading and networking with people on BiggerPockets will definitely help you grow. Good luck.

We need 500 - 1000 dollars per month. This can be challenging but is the very least we will accept. This is why we prefer duplexes, triplexes.  

We keep it simple: Buy the worst property in the best neighborhood. What we can't do ourselves, we source out to pros who guarantee their work. Location, Location, Location is the key. There's no need to overthink things!

I can fold sweaters part-time at Macy's for 200 dollars a month.

@Patrick Young

Interesting to see the feedback from everyone here...especially from the folks in different areas of the country. I focus mainly in the southern Raleigh area and 1% deals are typically what I am seeing. Granted I am not out making low offers for all properties. I focus on properties that cash flow between $100-$200 per month.

However, I think that for every investor this is going to be different. I noticed a lot of replies but each investor has to focus on what works for them. For example... if you are after a property that rents for $1k per month and you are self managing it with a 20% down payment, then the COC return looks good at 1% (for my goals). You would see a 9-12% return. However if you use PM, you might see a much less COC return around 5-8% which might not work with your goals.

My point here is that this is a difficult question to answer because it is different for everyone on what you want to achieve. I would say that after all expenses are paid and you are getting between $100-200 per month in straight cash flow, that is a good deal in my opinion for a Raleigh. However, it depends on how much you are willing to work for the return. I am sure there are better deals but for the near minimum, the 1% rule seems to work in Raleigh if you structure the deal right.

I just bought my first property on a 1% with the assumption that it will give me $100-$150/door. The ROI was at 6-7%, but now that I settled it has turned out to be closer to 4-5%.

Since then I've found a few owner/private financed deals that should give me $150-$200/ door at 10-15%. I'm working my a** right now to seal them up, find down payments, and pick them up.

 I think if I looked harder and was a little more adventurous on how I found deals, I could have done better on my first deal. 

One my first deal, as I watched my ROI slip from 7-5 I began to get a little depress and worried. I felt like I made the classic newbie investor mistake and jump at anything. Which I kind of did. However, what I realized is that this purchase was a win. I had set out to buy my first true investment property by the end of the year. And despite sinking my savings into it and not being able to BRRRR it I realize that it was a win.

It has given me more momentum and connections to find better deals, Owner financing, private money, BRRRR deals, etc. I say keep searching. Pick up the 1% that make sense to you and keep hustling to learn and find the better deals. Once you find your niche and get the experience, I think finding the good deal will become like a second nature.

I shoot for $300 a door cash flow with 25% down leverage on multi buildings. I don't waste my time with single family, would need way too many to reach my freedom number.

This is a great question and you can see how different investors all have a range of criteria as to what they will accept.

My longer-term goal is get to net cash-flows (EBITDA) from my RE investments up to $8k a month. I am about halfway there. Once I had this longer-term goal defined, I then started pursuing deals that would get me there with the understanding that I would not move out of NYC and not leave my day job which earns me good money.

NYC investing would not bring me any positive cash flows anymore so I have been investing out of state in TN primarily. 

I use very, very conservative estimates when I price out a deal. Lower than expected rents, higher than expected vacancy, and higher than expected utilities. But for a $150k purchase price on a SFH, with 25% down (investment loan, 30 year fixed at the best rate I can find), I look to get cash-flows about $300. That's $3,600 year on my investment of $37.5k (down payment) + closing costs ($2k) + repairs ($4k) = 8% EBITDA. I am okay with a return of that magnitude. If I continue to pick up 3-4 properties like this per year, then I am 13-15 more acquisitions away from my longer term goal. Which is roughly saving/investing another $600k.

I only own one duplex that has been rented out since 2014 without any rent loss, cross my fingers that continues.  But IME, $300 a door has been what I've cash flowed after all expenses, mortgage, interest, taxes, insurance, maintenance, paying myself an income for work done on the house and capex.  I run an excel spreadsheet that I created which keeps track of all of these items and the median cash flow for the year is $607 total for the duplex.  This past July took a hit on that months cash flow because I had to install a new chain link fence.  

So personally, I wouldn't want anything lower than that.  Also, I use my own formula when buying a rental.  For every 100k spent on a mortgage you'd better get at least 1k in rent.   Mine works out to 1.8k rent for every 100k spent, because I bought before the market got crazy.  

@Patrick Young you need to take a stance on appreciation and look at risk I think. From what I know about your neck of the woods its hot. So if you look at pricing people are probably building in appreciation rates that are high by national standards. If you think those rates are possible in the future than the investment might be a good one. Even if you are wrong a worst case of $170/months isn't great but its not horrible. Course I don't know where prices are going so for all I know they are headed down from the hot market now but being local and it being ur money that is something you probably should think about if its a good part of the return in your area. 

From a risk perspective in a good market typically vacancies are lower and its easier to sell/rent. 

Look at my market for instance, people are building in appreciation which is why cash flow is so low but the flip side is that if you have an apartment in NYC its unlikely to go without a renter for long if you price it right. 

@Patrick Young Everyone is going to have a different answer depending on their goals and their market. I invest here, and I look for homes that have any amount of positive cash flow and a good chance for appreciation.  The way I see it, If I were going to invest for cash flow, I would need a lot of properties for that cash flow to make a difference in my finances.  If I'm going to be working and making a good living anyway, what am I going to do with an extra 100-200/month?  What does make a difference to me is that the properties I own have appreciated $165k over the years I have owned them so far (even through the great recession). Once they are all paid off, they will make a significant impact on my retirement income.  If I do the math, if they all cash flowed $200/month, I would have made $120k over the same time period.

Thank you all, this has been so helpful! I'm starting to get a good grip on what is a "good deal" versus what just looks acceptable. It's very interesting to hear how everyone has slightly different requirements and expectations for their properties. I just have to determine what mine are going to be. 

I want at least $100 per door. 

1.5-2% return on purchase price 

I don't have any property in Raleigh area yet, but everywhere else I get 300-400 per month on a 100K worth of property.

I don't worry too much about discount I get on a property (purchase price) - I often buy at market value rather than getting a steal. I generally focus on rent ($) and (kind of) renters a property would fetch, cause that always wins in long run.

For numbers, a 100K property giving 300-400 a month after mortgage would give nice double digit CoC return. Then we add Depreciation and principal pay off part of mortgage. Appreciation in price and rent over long term - are icings :)

Also that when I do rough numbers, I only look further if a property is about 1% (in Raleigh area), and that it roughly gives CAP rate of over 8% on conservative number. For a 100K property with 30year note at 5.5% and 2,500 in closing/financing cost would mean that at 6.5-6.75 CAP rate, CoC would be same as CAP rate. And for every .25% delta in CAP rate, CoC would change about 1.1%. So my 8CAP would mean over 12% CoC, and meet 300$ per month target.

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@Account Closed I am under 10 loans, so I do enjoy enviable rates.

I had to extend contract twice for two straight forward cases in December with a national lender, so am trying a portfolio lender now. I will PM.

If I am not walking into equity and getting a minimum of 15% COC return or equivalent of 8% cap I am likely not doing the deal. Too much work to only get a single digit return on a tangible asset.

I haven't seen anyone post regarding the property depreciation factor. Does anyone use this strategy.

I am interested in hearing the tax strategy others use compared to mine.

Is the 2% rule not applicable anymore?

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