How much cash flow is necessary for driving a net profit?

13 Replies

My partner and I are looking into getting our next investment property with the intention to rent it out to tenants. When searching for properties in Arizona we are trying to make sure the numbers work out to justify it as a good purchase. When looking at estimated cash flow, what is the minimum threshold that you set for yourself to qualify you to buy it? 

I know with expenses they are infrequent but can be costly. What is your estimate for expenses and minimum cash flow that you look for in a deal? 

@Chris Trefry

it really depends on several factors.  for me personally, price of the property, how much money i will have to spend on repairs up front, and projected appreciation or equity.  i have one that i'm finishing up right now, and i will have about 50k total invested, and it will cash flow about $400 /month after all expenses are considered.   i have read multiple people's posts on bp, and some only require $100 per door.  for me i use my own personal funds for investing.  i look for higher returns on mine than most people because for me to tie up money... i need to make sure it's worth it.  just my thoughts.  

adam

My wife and I are currently looking at some properties and are trying to find deals that are atleast 100$ per door if not more. After doing a lot of research we have decided to put 50% of our gross income from rent towards expenses. Then after factoring in paying the mortgage we want atleast $100+ per door. We calculate using the BP Rental Tool putting maintenance and cap ex at 10% per and to be safe calculate Property Managers at 10-12%.

Places you can save money are having the tenants pay for all utilities. Depending on location that can be a considerable cash flow opportunity. Where we are looking to invest the water and sewage is estimated at 100$ a month for a 2 bedroom 1 bath duplex. If we can pass that onto the tenant instead that means an extra 50$ per door we will make.

A lot of people have suggested that we only put maintenance and cap ex at 5% per and PM at 8-10%, but that doesn't make us feel like we are being prudent enough with our first investment property and setting ourselves up for success. That is my personal suggestion, be on the safe side and if you find that you can get away with lower numbers then you do nothing but gain more income. If you underestimate it could cost you (and us - we are investing our own money just like Adam is)  significantly.

In our situation if our costs are less than we expect we will end up gaining an estimated additional 100$ per door, if not, we will be able to say with some peace of mind that we will make atleast 100$ per door.

I also agree with Adam that the amount that you invest and what you get out of the investment is important. You can calculate your cash on cash % using the BP rental tool as well. We have been using it to analyze every property we are looking at so far and it saves us a lot of time and you can run best and worst case scenarios just by editing the report that you generated for the property. 

Hope this helps.

@Chris Trefry we look for properties where our all in can be up to 140k or less after rehab and that 140k is 75% or less of the ARV and we can rent it out for around 1300 a month. But we follow a lease option model so we plan to fix them up and sell them within the next 3-5 years so we don't budget for repairs, cap x, turn over, or property management. When we follow this model we have little to none of our own money left into the properties and we cash flow about $200 a month per door that is split between my partner and I.

With each property that we buy we shoot for between 60k and 80k total profit over a 3-5 year period of time.

I think the 50% rule for out of state investors who put 20 to 25% down is a very good napkin math rule of thumb to triage deals up front.. 

and it works for basically any rents at 1200 to 1400 and under.. once you get over that amount of rent the 50% can go down a tad.. as your generating enough gross revenue to operate..

conversely when buying lower rent properties say in the 600.  range the 50% rule may need to be 60 or 70%.

If you do better fine.. and it really depends on area of the country...  desert areas as long as your HVAC is in tip top shape can be cheaper to own over time than homes in areas were it Snows.. and you have freeze thaw.

@Adam Drummond Thank you for your insight, we too are going to be using our own money that we have saved to invest in the property so it would be ideal to get more than $100 per door, especially since with a partner we have to split the profits so we would ideally like $200 per door as a minimum. 

@Brandyn Collins I like that you guys are playing it on the safe side when it comes to projections for expenses. We are lucky enough in this area to be able to charge the tenants for utilities which is helpful. I had no idea of the BP rental tool and we will now be using it while analyzing deals!

@Shiloh Lundahl That sounds like the ideal situation that my partner and I would be looking to do, the challenge is that in the Scottsdale area that we are looking, there is nothing under 300k. Maybe it is time we look into the Gilbert Area if that is where this model works out for you? 

@Jay Hinrichs That is an interesting way to look at it. How do people acquire 10-20 properties over the course of a year or two for rentals when they are required to put 20% down each time? That seems like you would have to have 200k+ to invest to make that work. 

Well  short answer is they don't.. or they have capital to buy them.. or they do what @Shiloh Lundahl does and puts together investments for others so you have in essence a small syndicate or partnership in the owner ship of the assets.

the other way folks do it is the BRRR which some people seem to think is new concept but it was the way investment property was bought pre 08 most of it any way.

you pay cash then refi out..  and you were buying so far under market that you get all your cash back at refi.

some markets you can do that others NO way.. you can get the odd one that cheap but not sustainable for lots of doors.

its market specific and regional.. 

@Chris Trefry

Minimum $300 / mo after all conservative assumptions would be the absolute minimum.  Closer to $500-850 would be better of course but at least here we're not seeing those opportunities any more.

However, equity and total cash position need to be considered heavily as well - not just cash flow.... Especially early on in your journey.

Cash flow is important but not everything.

@Chris Trefry Ha Ha.  That's funny. Yeah we don't invest in Gilbert.  I live in Gilbert because I like Gilbert, but I invest where the numbers make sense (to steal the phrase from the Real Estate Guys Robert Helms and Russell Grey).  We buy mostly in Mesa, Apache Junction, San Tan Valley, Florence, Coolidge, and Casa Grande, Arizona.  

@Chris Trefry Plan for vacancy, capex and repairs. Take that out of any profit forecast monthly. I usually set to 7% vacancy, 5% capex and 5% repairs. It’s important to note that this is for Atlanta and I generally know what I’m looking at for the life of the roof, hoax etc.

We do a version of the BRRRR method, like Jay mentioned, mixed in with the lease option method. The cash flow that we get is relatively small. We look at it more like a long term (3-5 year) flip that minimizes costs such as realtor fees, concessions, most closing costs, and short term capital gains where the tenant pays down the mortgage on the property until they exercise the option. If you are in town on August 15, we will be having a meetup in Mesa where we go over the current deals that we are doing and the model we are using.

You can find out about the meet up in the networking section of the site.

https://www.biggerpockets.com/forums/521/topics/592994-investor-meet-up-in-mesa-arizona

@Chris Trefry

Scottsdale is much better suited for an AirBnB / VRBO type strategy, or for higher end vacation rentals for well-to-do snowbirds. Wouldn't recommend it for general buy-and-hold investing as your money will go much further elsewhere.

The two approaches to real estate investing are:

1) Find out what strategy works for you, then find a market that fits it

2) Find out what strategy works in your market, and then use that strategy

There are many other areas around the Phoenix metro that may be better for the strategy you're using, as others have mentioned. Best of luck!

Originally posted by @Jim Goebel :

@Chris Trefry

Minimum $300 / mo after all conservative assumptions would be the absolute minimum.  Closer to $500-850 would be better of course but at least here we're not seeing those opportunities any more.

However, equity and total cash position need to be considered heavily as well - not just cash flow.... Especially early on in your journey.

Cash flow is important but not everything.

Jim,   How much are you investing to expect 500-850 per door net each month?  My project that i have right now should be 350-400 net after expenses monthly.  The total project including purchase price will be about 50k, and then i will refinance and pull some equity out (brrr method).  

thanks,

adam

@Adam Drummond

We’ve taken a 2 prong approach to our investments. The first is buy more cash flow properties as we call them. That consists of Des Moines metro properties that we buy with cash. We’ve bought at $36-52k cash for those.  Range of money invested after purchase is from $8k-55k there. Then the second prong is to buy with leverage into properties that we believe have a better chance at appreciating over time. Those we’ve bought so far focused in the Ankeny suburb/ market with price between $110-174k. 

In both cases I don’t think we have cash flow below $400 the only exceptions being 2 properties with a 10 and 15 year note (much higher payments)

Top end of cash flow is a couple properties are doing $850 and $1050 estimated net cash flow per month. Those are both Des Moines metro properties. Those opportunities don’t exist anymore/right now.