What is the minimum cashflow you would accept for a rental?
Ottawa, ON · Member since 2019 · 14 posts · 7 votes
Brandon recently said that $200 of cashflow after expenses (including mortgage) on a house is a homerun. I am aware that different markets produce different results, but what is the minimum amount of cashflow you would accept on a potential property? I am in Ottawa, Canada and apparently downtown SFH's and duplexes should go for a minimum of $1000 after expenses. Thoughts?
If you would like to, post all the numbers for the two properties you purchased and I will put the numbers in my number cruncher. Then, there are a few factors only you know because I don't know what the market is like in your area.
What did you like better about the two properties compared to others you looked at?
Total purchase price with all closing costs.
Re-sale value if you re-sold it the day escrow closed.
Property taxes, insurance, mortgage, trash, sewer fees, gardening and all other costs.
Rehab or repair costs when escrow closes.
Year built
How many years does the roof have left?
Percent you put aside for unexpected costs for sewer outside the house, plumbing, painting inside and out
Fence repairs and expected cost to remove or trim large trees.
HOA fee
Expected cost to sell the property
Management fees.
How long do you expect to keep the property
Monthly rental income when escrow is closed
How much can you raise rent the day escrow closes.
How much can you raise the rent every year.
I'm going to sound like a broken record because I say the same thing one or two times every day.
Put away all the rule-of-thumb analysis and write down this business model.
Good Investor's Creed
"I will only invest in a property when I have calculated and analyzed the investment so that I am 100% positive the money invested in the property will give me a 50% to 100% return on my money in 1 to 2 years. I will listen to the advice given to me by my broker and friends, but I will never make a decision based on their advice. I will always calculate my risks to reward. I will not allow anxiety to cause me make rushed decisions. I would rather keep my money in my pocket and wait until I find the deal I am 100% positive about rather than take even the smallest risk."
Obviously, I just made that up.
How do you make 50% to 100% on your money every year. You keep your money in your pocket until you find a property that will return to you, in 1 to 2 years, 50% to 100% of the down payment. So, if you put $40,000 down on a property you want to earn $40,000, preferably the day you close escrow because the property is already worth $40,000 more that you paid, or you want to earn $40,000 in profit within 1 to 2 years through appreciation plus cash flow (but, for single family properties I don't include appreciation in my analysis). You look at hundreds of properties and crunch the numbers 100 times on each property. Purchase at auctions, from wholesalers, make hundreds of low offers, go to real estate clubs, etc.
@Yazan Ayyash I am shooting for $200 per door. I’m currently investing in class C properties. One house at a time in the Chicago area.
@Jack Orthman how would your ROI decrease on a rental over time where you are continuing to increase rent while having the mortgage or loan being paid down on the property?
I’m happy with 100 dollars a door. But I include everything when calculating that.
PITI
Lawncare
Property management
Pest control
Repairs
Vacancies
CapEx
Miscellaneous (anything I pay for but can’t think of it off the top of my head).
If you paid cash you would expext a cap rate profit not per door.
How does the ROI for real estate decrease every year. I wish we had the ability to post images.
As states in many posts, you don't get rich collecting rents and having tenants pay down the mortgage.
According to the charts I cannot post:
Purchase an average property for $140,000
The value at the close of escrow is $140,000
Down payment $40,000
Closing costs $3,000 and add to $40,000 = $43,000 down payment
Cash flow is $338 per month
First year return is 0.65%
In this deal the ROI actually increases every year. 1st = 0.65% 2nd = 5.41% total average over 30 years = 9.82%
Now I will show how the ROI decreases every year. The first property was a dog because you don't get rich from rental income.
I did calculations for the same house with several different down payments. My business model is to double my investment capital every year, or earn 50% to 100% on my investment capital every year. Of course, these numbers do not include many factors. Some factors are in your favor i.e. credit for interest payments, depreciation, or whatever and some factors are not in your favor i.e. your cost to sell the property. So, maybe the good and the bad are 'a wash'.
Purchase the same property for a discounted price of only $20,000. I like $40,000 better, but I will go low for the purpose to show the numbers.
Purchase an average property for $140,000
The value at the close of escrow is $140,000
Down payment $40,000
Costs $3,000 and total down payment is $43,000
Cash flow is $338 per month
First year return is 50.69%
In this deal the ROI actually decreases every year. 1st = 50.69% 2nd = 30.41% total average over 30 years = 11.49%
Now, if we increase the rents every year, the average ROI for the first property over 30 years is 11.56%
The average for the 2nd property over 30 years is 13.23%
The problem is; we don't live in an ideal world. Investors who think they are going to purchase just any property with a $100 to $200 positive cash flow are in for a big surprise after a few years. I purchase every single-family property with cash and no financing. You would think that I am making bank, but for me average home, with no financing, in Idaho and Las Vegas, I net $4,000 to $5,000 per year. Don't forget. NO FINANCING! In January of this year, I drove from Los Angeles to Idaho to clean a 20-year old home. I did only the normal things that every homeowner has to do to every home. This was a 4-bedroom e bath home. I had to replace 3 20-year old bathroom sink bowls, put in imitation granite kitchen counter tops, new stove and dishwasher, new doors and drawers on the kitchen cabinets, paint the ceilings and walls, plastered and painted the garage, repaired fences, cut and trim three huge trees, go to the dump with a large trailer 3 times, paint portions of the outside the house, cut and repair a cracked concrete sidewalk, replace screens, level the yard. repair a lot of plumbing and the list goes on and on.
I gave this house to my son about 6 years ago. So, after spending 13 days working on the house from 5 am to midnight every day my son sold the house. My cost for the repairs was $18,000 not including any labor. I gave my son a very legitimate bill to be paid through escrow for $34,000 when adding the labor.
So, take your $100 to $200 per month, add your costs for financing and tell me how many single family homes it will take while earning $100 to $200 per month to break even to pay for this one house.
I purchased 10 homes in Boise and Meridian Idaho about 14 years ago and figured that if the property values increased only 5% per year I would be living on Easy Street. I did the math before I purchased the homes and never did it again. I paid an average of $130,000 for each home and each home increased in value by about $100,000, but don't forget that I paid cash. Had I financed the properties I think I would have earned an average ROI of less than 5%.
I think the investment advice on BP is one-sided. I love the real estate business, but I don't think people should be taught with such motivation that they think they can walk on water. I would like to see a balance with success and horror stories for the sake of teaching investors to calculate their risks and to be aware of the pitfalls. I am not embarrassed to say that I lost $1 million two times. Once, investing as a limited partner in a syndicated property for two K-Mart shopping centers and the 2nd time was in the stock market. Those two losses hurt and sent me 10 years backwards. But, it made me stronger to the point I ponder over every purchase I make. I look at hundreds of properties before making a purchase. I crunch the numbers 10 to many times over and over. I never make decisions bases on a broker's or another person's advice. It is not their money that is being risked and it is too easy for someone else to tell you to pull the trigger.
Purchase an average property for $120,000
The value at the close of escrow is $140,000
Down payment and all closing costs $3,000 and your equity is already negative $3,000
Cash flow is $338 per month
First year return is 0.65%
In this deal the ROI actually increases every year. 1st = 0.65% 2nd = 5.41% total average over 30 years = 9.82%
Sorry! The numbers in the last post for the 2nd example are not correct. The correct numbers are on the bottom of the post. Don't know what happened. The ROI in the 2nd example is correct, but the purchase price was supposed to be $120,000 (not $140,000). It would be nice if we had the ability to edit posts.
Too confusing with the mistake. So, I reposted it.
How does the ROI for real estate decrease every year. I wish we had the ability to post images.
As states in many posts, you don't get rich collecting rents and having tenants pay down the mortgage.
According to the charts I cannot post:
Purchase an average property for $140,000
The value at the close of escrow is $140,000
Down payment $40,000
Closing costs $3,000 and add to $40,000 = $43,000 down payment
Cash flow is $338 per month
First year return is 0.65%
In this deal the ROI actually increases every year. 1st = 0.65% 2nd = 5.41% total average over 30 years = 9.82%
Now I will show how the ROI decreases every year. The first property was a dog because you don't get rich from rental income.
I did calculations for the same house with several different down payments. My business model is to double my investment capital every year, or earn 50% to 100% on my investment capital every year. Of course, these numbers do not include many factors. Some factors are in your favor i.e. credit for interest payments, depreciation, or whatever and some factors are not in your favor i.e. your cost to sell the property. So, maybe the good and the bad are 'a wash'.
Purchase the same property for a discounted price of only $20,000. I like $40,000 better, but I will go low for the purpose to show the numbers.
Purchase an average property for $120,000 (Same property as above, but with a $20,000 discount)
The value at the close of escrow is $140,000
Down payment $40,000
Costs $3,000 and total down payment is $43,000
Cash flow is $338 per month
First year return is 50.69%
In this deal the ROI actually decreases every year. 1st = 50.69% 2nd = 30.41% total average over 30 years = 11.49%
Now, if we increase the rents every year, the average ROI for the first property over 30 years is 11.56%
The average for the 2nd property over 30 years is 13.23%
I tend to look for $100 a door, again this is after assuming the worse in all other numbers and with the hope that it will become more as time goes on and improvements are made.
@Yazan Ayyash: For me it is simple. My net MINIMUM before tax cash flow (as in every expense has been paid + money set aside for future repairs + Vac Factor + CapEx) is: $300/mo for a SFR; $200/door/month for multi-units. If my deal will not produce that NOW, then I will pass on the deal.
The key is to do an excellent and detailed job on your DD and market/rental analysis. Never "make" a deal work. It either stands on its own or it does not.
Hope this helps.
@Yazan
I’m to the west of you in Canada, after normalization (usually 1 year) I won’t accept any less than $500 on a suited single family home. This is after 10% management, 10% r&m, 8.5% vacancy, mortgage, current taxes multiplied by 1.2, current insurance multiplied by 1.2, any utilities im paying averaged for the year multiplied by 1.2.
Normalization includes me doing any repairs or renovations such as replacing the 60 year old furnace or similar.
@Yazan Ayyash it really depends on preference and goals. I know some investors would satisfy on break even as long as the principal is being paid and the real estate is appreciating. It’s just like sticks, some investors invest in stocks for dividends and other look for short/long term gains.
@Yazan Ayyash all depends on your personal situation but I would only go as low as $200 per door and per sfr for cash flow after all expenses paid. Need to make some money to save and for reserves also.
For me it would depend on the individual property. Something in a great location with property values that are likely to improve significantly I’d be willing to cash flow as little as $50. Rougher areas that attract lower quality tenants or are unlikely to see above average appreciation would need $300+ to be worth the effort.
@Jeremy Holcomb where do you buy $4K worth of properties???
@Yazan Ayyash some people use a per door method and some people use the building. I have a low income property that per door wouldn't make the cut because I rent each room but the property has 8 doors and has been relatively cheap to maintain due to the area. To be honest, I really bought the property to fix a land issue that my other property had and didn't want the headache of trying to negotiate when I would loose.
@Account Closed, That purchase price of $4K was a great deal that was listed online. The property is in Palatka, Fl. I’m not sure how many others have found something that inexpensive. I do know most rust belt areas and depressed areas have houses listed for cheap. Also, if you’re brave enough for a tougher challenge some cities with proof of funds to rehab will sell you a house for a $100 if you rehab it within a certain time frame. It takes a lot of legwork to find those deals. My average day consists of looking at a minimum of a 100 house listings in the areas I buy seven days a week. Out of the entire month I will personally go look at 45 of those listings and close on approximately 3 deals.
Cash flow is very easy to manipulate with down payment. Putting more money down will increase your cash flow. So would you rather have $200 cash flow after investing $50K or $10 cash flow for investing $1000? This is where ROI comes into play. That is return on cash invested. It is also where the power of leverage becomes important, because the cash can be invested in other deals. So you have cash return, plus opportunity cost.
The other factor is how you are calculating cash flow. Many people take rent-payment and call that cash flow. They neglect to include expenses, whether real or allotments. Real expenses are hard costs you incur. Allotments are things like CAPEX. You may set aside 5% per month, but you may not incur actual expense that month.
I don't fixate on cash flow, but we like to see $400 per door. I have a couple properties on 15 year mortgages that are less than $100 away from payment. Not great, but they are low interest loans that will be paid off in six years. We have massive equity. It is just part of the mix.
Don't get hung up on what Brandon or anyone says. There are several metrics to look at and many factors. That being said, if an investment isn't putting cash in your pocket, then it becomes a liability.
Brandon recently said that $200 of cashflow after expenses (including mortgage) on a house is a homerun. I am aware that different markets produce different results, but what is the minimum amount of cashflow you would accept on a potential property? I am in Ottawa, Canada and apparently downtown SFH's and duplexes should go for a minimum of $1000 after expenses. Thoughts?
We don't have a minimum cash flow number in terms of $. We have a minimum ROI. So does Brandon.
@Jack Orthman do you ever have Meetups? I'm in your area and would like to learn more.
@Yazan
I’m to the west of you in Canada, after normalization (usually 1 year) I won’t accept any less than $500 on a suited single family home. This is after 10% management, 10% r&m, 8.5% vacancy, mortgage, current taxes multiplied by 1.2, current insurance multiplied by 1.2, any utilities im paying averaged for the year multiplied by 1.2.
Normalization includes me doing any repairs or renovations such as replacing the 60 year old furnace or similar.
Curious what is your purchase price and monthly rent price that gets 500 andoor after all our expenses?
@Eric C.
Last one was May 4th this year I took possession of a 3 up 2 down triple detached legally suited property which was needing renovations but not really any repairs. Purchase price was $323,000.
That’s what I do. 1100-1250 sq ft bilevels 3 up 2 down double detached is the target.
Currently it is rented for $1300 up, $1100 down, $400 garage, tenants pay heat and power, I pay water.
@Jeremy Holcomb where are you able to buy a property for 4K?
@Elizabeth Wardecki I found the property online listed for sale. It is located in Palatka. If you want inexpensive properties be ready to do a ton of work. You can find cheap houses all around the country. I explained some of how I find inexpensive houses in another post here on BP.