Cashflow

8 Replies

How much cashflow for a rental property is considered for it to be worthwhile?

Everyone has different criteria.

I want over 10% cash on cash return on my rentals.  So in my area I am looking for around $200 per month in cash flow per home.

I personally think that cash on cash return percentage is more important that cash flow in terms of dollars per month.  However, cash flow and cash on cash return are just starting points when analyzing a deal.

Feel free to post an example of a home that you are looking at.

Definitely positive is my answer as well. But the tricky part there is making sure you have enough margin to ensure you stay positive in case of unexpected repairs or vacancies. It also depends on which market I'm buying in. You can't expect the same amount of cash flow in each market. Texas cities will be less than places like Indy or Philly or Birmingham or those, but still more than anything you could ever buy in CA (which I would expect zero or negative cash flow in). So cash flow expected is relative, at the same time trying to make sure it's high enough to allow for some margin.

@Joshua Chen  

I have a minimum of 10-12% cash on cash return, after allowing for vacancy and maintenance reserves, but as others have said, everyone has different criteria.  Keep in mind that additional benefits come from tax deductions for things like depreciation (even if the house is appreciating in value) and mortgage interest. 

 I look for $100 per door after all expenses.  

I guess I'm a little more stringent than most. For me I'm looking for 20%+ cash on cash with a minimum of $100/mo/unit net. I figure I can get 8% on average over the long term in the market sticking with an index ETF, and not selling, and get all of the same tax benefits (since I'm net selling), and since I'm not betting on appreciation, it's gotta be better than this by some margin, otherwise I'll just get another job!

If I can get all of my cash out in a short period of time (6 mo) or put no money in, I'll settle for $100/unit/mo.

All of the $/door numbers are useless in my opinion. Because they do not put the cost of ownership in perspective. If you own a SFR that cost $5k a month to own, you would never be happy with a $100/month return. For me everything boils down to DSCR.

DSCR = Debt Service Coverage Ratio explained here

http://www.investopedia.com/terms/d/dscr.asp

You need to determine what your DSCR minimum standard should be. Banks will tell you they typically want to see an experienced investor get a bare minimum of 1.20 : 1 This ratio should also be adjusted for risk. If the property or the investor is on the risky side banks may want a 1.5:1 ratio.

When calculated correctly DSCR is one of the best ways to analyze a properties performance. But DSCR is only 1 piece of the puzzle. I also look at some other numbers like COC and ROI for my new acquisitions.

When I started out I didn't have any money to spare so I leveraged hard at 1.2 DSCR. Now I look for 1.4 or better.

Ben Leybovich goes thru DSCR very well on one of his Podcast appearances, I think it was his 2nd but I'm not sure.

Originally posted by @Joshua Chen :

How much cashflow for a rental property is considered for it to be worthwhile?

Cash flow is not profit.  If someone is selling cash flow they are probably trying to sell and unprofitable property.

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