newbie question, gross cash flow vs net cash flow

9 Replies

As a new investor. I am more concerned about gross cash flow.

Which is simple rental income - principal-interest-tax-insurance

In the Indiana market I have been shooting for $500 in cash flow per property.

I see most people here are more focused on NOI(net cash flow), while I understand the importance of this, as it is a better guage of actual money coming in the door over the long term(roofs,water heaters,windows) add up over time and take away from cash flow.

Does anybody else focus more on this number? rather than applying the 50 percent rule to get to NOI?

I guess what I'm saying is, you don't necessarily have to drill down to repairs/expenses over the long term. If you are bringing in 850-1000 a month in rental income and taking care of PITI and walking away with 500 each month. The analysis can probably stop there, it makes a good rental atleast by the numbers

Thoughts?

I call your number (rent - PITI) "phoney cash flow". You're not walking away with that number. Many, many other very real costs will occur that will eat into that money. If you're ignoring the real costs of owning a rental you're setting yourself up to fail.

This number is commonly used by sellers and their agents to lure in naive buyers. Don't be that naive buyer.

This is like a factory owner saying "Raw materials are $50 per widget and I sell them for $100 each, so I must be making money." Never mind it takes a $100 million factory and labor costs of $25 per widget and another $25 in sales and admistrative costs.

Jon Holdman, Flying Phoenix LLC

Originally posted by @Gabe G. :
I guess what I'm saying is, you don't necessarily have to drill down to repairs/expenses over the long term. If you are bringing in 850-1000 a month in rental income and taking care of PITI and walking away with 500 each month. The analysis can probably stop there, it makes a good rental atleast by the numbers

What if you spent $1M on that rental. Do you still agree that $500/month makes it a good rental? What if that $500/month is based on gross rents of $6000, and you're not yet figuring in paying 10% in PM costs? Is that a good rental?

My point is, you're skimping on your analysis, and any time you leave out pertinent information in your analysis, your results are suspect. Even if you did know what you paid for the rental, how do you know $500/month in "gross cash flow" (that term is awkward, btw) is good? Certainly, if the rest of your expenses are only $10/month, that's probably pretty good. But, what if the rest of your expenses are $600/month?

Again, without doing a full analysis, your results are meaningless. Without knowing the vacancy rate and rent loss, your operating expenses and your capital costs, there's no way to determine if your deals are good...or horrible.

EDIT: @Jon Holdman and I were typing at the same time...he said it a lot more succinctly.

I understand your point and you are right. And I don't buy turnkey properties so I am not being sold a line.

Obviously is we are talking about 2k a month rentals the 50 percent rule would eat into 500 a month after PITI

But considering all rentals I have and will purchase are from 700- 1100.

If I buy the property and it cash flows 500 a month after PITI, it will automatically work in the 50 percent rule. Because in my area, 500 a month of gross cash flow, usually works out to 200 a door using the 50 percent rule.

Just trying to get everybodys thought process.

Originally posted by @Gabe G. :

Just trying to get everybodys thought process.

My general thought process is that if you don't have the time, skill and motivation to do a full analysis, you're better off not making the investment. Especially for a single family rental, where the process is relatively simple.

And no J scott, if I paid 1 million for a rental, that cash flowed only 500 a month, that would not be a good rental.

I guess I am talking in my area. my rents range from 700-1100

If you are cash flowing, even phony cash flowing(I agree gross cash flow is not a accurate term) 500 after PITI, the property works.

Originally posted by @Gabe G. :
I guess I am talking in my area. my rents range from 700-1100

So, you can say that this method of analysis works *IN YOUR AREA*. I guess I'll take your word for that...

But, for anyone who doesn't live in your area, I would recommend doing a real analysis before buying a property.

I agree with @J Scott - you can do whatever you want once you know what works in your area. I don't use any "rules" when I go to look at properties in my target neighborhoods - I go in knowing exactly what I'm looking for and looking to avoid and quickly figure up a price at which the property will work for me. It is usually MUCH lower than the list price, but sometimes it's much higher and I'll make an offer on the spot.

I don't spend any time re-doing projected expenses because I've done it hundreds of times and know what will work for me in the areas I invest in. I would not generalize this approach to other neighborhoods in my city that I don't invest in and certainly wouldn't consider it for investing in new cities.

If you know that having $500 leftover after PITI will work for you in your area, then you can use that as a metric for the areas you invest in. Just don't make the mistake of assuming the same is true anywhere else!

Medium logoMichael Seeker MBA, Renting502 | http://www.Renting502.com | Podcast Guest on Show #94

I use the 50% rule almost religiously and since i've now been through a number of deals it's pretty easy to factor in what is it and isn't a good value. For a newbie my main concern is the stuff that's going to be big chunks out of your pocket (furnace, foundation, roof,) If those are things you think are in pretty good condition then it makes it pretty easy if not you want to factor in replacing those asap and price that into your offer.

I make a lot of offers and a lot don't get accepted lol, but I always try to put myself in the best position in knowing what I know. I still miss things a lot of things, but I've come to get a good grip on what I should be looking for that's going to be big $$ out of my pocket and factor those into my offers. If you're cash flowing $500 on single family homes financed I want to see what you're buying!!!