Investor · Houston, TX · Member since 2022 · 126 posts · 122 votes
You hear so much (I guess from the gurus and course sellers) about how “predictable” the cash flow is from rental properties. Well I adamantly disagree. You have a maintenance issue…unpredictable cash flow. Your insurance premium goes up…unpredictable cash flow. Tenant doesn’t pay their rent…unpredictable cash flow. And the list could go on. If you’re just getting started in rental properties, just beware that the cash flow is UNpredictable.
You hear so much (I guess from the gurus and course sellers) about how “predictable” the cash flow is from rental properties. Well I adamantly disagree. You have a maintenance issue…unpredictable cash flow. Your insurance premium goes up…unpredictable cash flow. Tenant doesn’t pay their rent…unpredictable cash flow. And the list could go on. If you’re just getting started in rental properties, just beware that the cash flow is UNpredictable.
So I get what you are saying, but I don’t know if I totally agree with you. If you want to nit-pick reality, I guess I could get on-board… but the general concept is that you make allowances for the things you are talking about. I have 37 units. I have a maintenance reserve account I fund with over $3,000 for repairs a month. I have an escrow account that I fund with over $5,000/month to cover tax and insurance payments due across the year. While those escrow accounts are funded from GROSS cash flow - I don’t count those escrows as a part of my income from my business. They are really pre-paying expenses.
Maintenance issues, taxes, and insurance expenses are all expected things - and frankly they are expected to increase every year to the point I actually over fund my T&I account by about 10% to compensate for those increases.
So if we turn to rent, yes, someone can be late on their rent. But 9 times out of 10 that is made up for within 30 days by the tenant - so cash flow for the month USUALLY is consistent for the month - but maybe not by the 5th when it is due for us.
On rare occasions a tenant can’t - or chooses not to recover and they get evicted. Maybe THEN you see what you hoped wouldn’t happen - that you may be out a month’s rent or so - but that is why we mention a vacancy rate when forecasting rents, right? To say repairs and price increases imply unpredictable cash flow I think is an over statement if you are running your business right.
Does a credit card company say their cash flow is unpredictable because of late payments and defaults and charge-offs? No - they expect them. They plan for them - in essence they budget for them to the point they are listed in their annual report.
You hear so much (I guess from the gurus and course sellers) about how “predictable” the cash flow is from rental properties. Well I adamantly disagree. You have a maintenance issue…unpredictable cash flow. Your insurance premium goes up…unpredictable cash flow. Tenant doesn’t pay their rent…unpredictable cash flow. And the list could go on. If you’re just getting started in rental properties, just beware that the cash flow is UNpredictable.
Do you due diligence and trust your gut. Also find a mentor that is already doing it for a while or a Realtor who is investor friendly and also owns rentals.
Accountant · Indianapolis, IN · Member since 2019 · 247 posts · 134 votes
2y
This is a reason why I do cash flow forecast for my clients each month. Not only actuals but 3 years into the future as well. We make sure to include vacancies, Capex, and maintenance. We anticipate these cost a long with tenants not paying on time.
Investor / Mentor / Contractor · Arcadia, CA Buying Out of State · Member since 2015 · 654 posts · 622 votes
2y
Terra, in my experience you are correct if the investment is a SFR or small multi. But when you get over 30 units it is predictable because you cost all of those expenses you mentioned in. So I guess if you want more predictability, go bigger.
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
2y
The gurus tend to oversell things enormously. They both understate the amount and regularity of costs. I put in a recurring CAPEX or replacement reserve in my analysis for things like roofs, HVAC, etc. as well as general maintenance and turnover. But even still, we book a small amount per month when actual recurring capex usually goes something like:
I appreciate your perspective on the unpredictability of cash flow in rental properties. It's a reality that amplifies the importance of conservative underwriting.
In the last few years, the market became so competitive that many investors resorted to aggressive underwriting to justify their deals. This approach can be risky, especially when unexpected expenses arise, which they inevitably do. Proper planning for these uncertainties is essential.
During your due diligence period, it's important to thoroughly assess the condition and age of all major systems and components in the property. Understanding the remaining life expectancy of these items and reserving funds for their eventual replacement or repair.
Insurance costs are another significant factor. While some increases can be anticipated, the recent spikes in interest rates were unforeseen by many. This has affected insurance premiums and, subsequently, cash flow.
If you are conservative with your rental projects, you won't need to push rents as high which means you'll likely have lower vacancy.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
2y
My Class A units have very predictable cash flow. In fact they’ve all had better than anticipated cash flow because rents have gone up a lot more than I forecasted in those areas. My Class C rentals never had the cash flow I hoped for and I sold them. In my experience cash flow is much more predictable in good locations. Then again, so is appreciation. Both appreciation and cash flow are educated guesses. Most of the time when an investor asks me to help underwrite a property with less than $1,200/month rent coming in per door, they have a couple hundred coming in per month positive cash flow on their spreadsheet and I have a couple hundred negative on mine. Most people don’t account for expenses accurately and low rent properties have a hard time keeping up with all the expenses involved with operating a rental, in my experience. If you’re not budgeting for $300-500/ month on average in maintenance, repairs and capex, you’ll probably be running negative unless you are deferring whatever you can (but that will catch up with you eventually).