I think there are always other variables that come into play when discussing cash flow. For example, I look for at least $100/door but on a 15 year note and in a C+ or better neighborhood.
Further, everyone calculates cash flow differently. I calculate cash flow as gross rent - 30%(vacancy, maint, and capex) - PITI = true long term cash flow.
As an example $1000 (rent) - $300 (vac, maint, and capex) - $600 (principal, interest, taxes, and insurance) = true long term cash flow. And remember the principal and interest is based on a 15 year note.
I plan to cash flow over 15% on any investment I make in Real Estate if it is not over that amount I tend to not pursue the deal unless I see some sort of major appreciation in value coming to the area/property. The question would be specific for the different markets because the different markets and the A,B,C, D grade investment properties typically play hand and hand higher risk means higher reward , lower risk means lower reward (ie cash flow)..
@Dontrea Riser, the more important question is how much is cash flow in relation to the money invested? This is why cash-on-cash is so important. The rate at which you make back your initial investment, to me, is one of the most important factors in settling on a specific property. The faster you make that money back, the faster you can use it again to go buy more and expand your portfolio.
@Matt Burr not so sure I agree with that. Every property will have a headache; if you're making money off of it it should be "worth your time" -- is $5 CF worth your time when things are not good? I don't know.
@Dontrea Riser as you can see, a lot of different answers. I think Brandon Turner coined and pushed the $100 CF per door/per month figure, and a lot of folks use it. I think it's a good number to use.
My current duplex I estimated would cash flow about $222 per month, so $111 per door. My "all-in" figure was $31,728 for my down payment of 25% and closing costs. I've YET to turn a profit in 18 months, although I am close. The reason is for this is that I grossly underestimated, and did not adequately prepare for, CAPEX/maintenance issues outside the purchase. I should have setaside 8-10k, which would have lowered my COC return, but not my profit.
Let me explain - I would have, at $31,728 and my initial investment, made about 8.42% COC return. If I did $31,728 plus another 8.3k (around 40k), my COC return would have gone down to 6.68%, but I would have "made money" because instead of taking my cash flow to pay for those unexpected items, I would have used my setaside reserves. But I still paid one way or another. :D
I aim for $2,000,000 COC per month with leverage otherwise it's a terrible investment. I won't even consider $1,500,000. We have a strong market. Best of luck.
@Joe P. you are correct it may not be worth it if you are jumping into a whole new area or a war zone area. In my case it is the same town I have several other properties in. I will be using all the same vendors and property management. In theory shouldn't be to bad on the headache side.
To piggy back on this post a bit. I am looking at a few properties in a small market. Property prices are pretty low. I have always told myself the $100 a door rule but I am finding properties now that are not quite at the $100 mark but my Cash on Cash on Cash return is north of 18%.
I have been investing for real estate for several years and I cant think of a reason why this wouldn't work. In other words 18% is 18% no matter if I make 5$ a door or 500$ a door assuming I have my expenses figured accurately which I always make very conservative.
Anyone have any thoughts on if my logic is sound o
You make a good point. I think what you are illustrating is that most of these rules of thumb $100/door, 1% rule, 2% rule are just that rules of thumb. There is an art form to this business and so much depends on our personal situations. I know plenty of people who are well off and don't need additional cash flow but they do need a place to stick their money that provides a reasonable return. These people are willing to pay more for real estate than I am and they don't care about the $100/door.
I think another interesting topic is how we all calculate cash flow. We talk about it like it's a set thing but I would bet that many of us use a slightly different equation for calculating it.
@Dontrea Riser In a c class area in OKC if you factor 5% of rent per month for vacancy, 10% of rent per month for property management, 1% of purchase price annually for taxes, 1% of PP annually for insurance, 5% -10% of rent per month towards maintence and you pay the debt service on a 20% down 30 year conventional loan at 5.25% you're typically looking at a true net of $130-$180/month.
To piggy back on this post a bit. I am looking at a few properties in a small market. Property prices are pretty low. I have always told myself the $100 a door rule but I am finding properties now that are not quite at the $100 mark but my Cash on Cash on Cash return is north of 18%.
I have been investing for real estate for several years and I cant think of a reason why this wouldn't work. In other words 18% is 18% no matter if I make 5$ a door or 500$ a door assuming I have my expenses figured accurately which I always make very conservative.
Anyone have any thoughts on if my logic is sound or not?
My thoughts are that owning buy n hold is not 100% passive even with a PM. Therefore a property that has a low return amount basically amounts to a job. For example lets for grins say I could purchase a $100K place for $1K out of pocket. Now say the return in year one is forecast at $360/year. Good cash on cash return, 36% for the first year. Would I purchase this property? I would not. Owning buy n hold RE has a certain effort per unit. To me that effort is larger than $30/month.
I would not do it for a total expected return of $100/month, $200/month, or $300/month either but I realize I am in a fortunate position and not just starting out. I suggest no one do a buy n hold for a projected return of less than $100/month and that the $100/month really should only be for those that are just starting. It just is not much return for the effort involved in acquiring, maintaining, managing (either manage the tenants or manage the PM), and the financials (taxes, payments (it sucks when loans get sold), etc.), and at some point selling (either you or the heirs).
I agree even with PM it is not close to passive. I should have been clear though that the properties in question are 3-4 units and cash flow for the whole property is between $300-400 per month. Both are honestly just shy of the $100 per door mark but there are several doors.
Totally agree it isn鈥檛 worth it for $30 bucks a month.
I'm currently considering a property at 16.70% CoC / Cashflow $38.27. All of my criteria is met and there is opportunity to raise the rent a bit.
You are considering purchasing a job.
No way would I choose all of the effort associated with a buy n hold for $39/month regardless of the COC. This is because buy n hold is not totally passive. The work you will do for a unit is worth more than $39/month. You are worth more.
$100/month return producing a good COC really should be the minimum bar for someone starting out.
As for the OP's cash flow question there are so many variables that go into cash flow such as LTV, class of property (class D can produce better cash flow than class B but to do so will require a lot more effort and have more risk), STR vs LTR (we have an STR property that cash flows around $10K/month), who performs the maintenance/cap ex items. I.e. an owner who does his own repairs can cash flow better on a property but 1) they basically have a job as a contractor 2) how can they scale? Similarly an owner that actively manages their own employees can cash flow better than someone that hires all work out to licensed contractors (which is more passive).
I agree even with PM it is not close to passive. I should have been clear though that the properties in question are 3-4 units and cash flow for the whole property is between $300-400 per month. Both are honestly just shy of the $100 per door mark but there are several doors.
Totally agree it isn鈥檛 worth it for $30 bucks a month.
You are close to the $100/door minimum and because it is a multi unit there will be a bit less work per unit (ex. new roof done once for 4 units versus 4 separate times). So maybe the formula for starting out needs to be a bit more complex than at least $100 return/unit with decent COC (at least 12%) as I would rather have $90/unit on a quad than $100/unit on SFH (but there are more management issues with quads than SFH because there are more neighbor issues - noise, parking, clutter, smells, etc.).
It sounds like your case may squeak by on my minimum expected return for someone starting out (especially if that is the return with use of professional PM). At the very least it is close enough not to be a significant mistake.
@Dan H. Very good points, my previous purchases where at $200 cashflow. I guess I am just a bit anxious to get started this year, it is already February. I'll be posting about my first purchase for the new year, I know that I can find one with better numbers.
@Matt Burr I'm new so take my advice with a grain of salt, but the only "missing piece" I can think of is the tenants (and property management costs). There is a Cincinnati suburb where property is cheap and CoC return is high but the neighborhood is pretty rough. I'd imagine turnover would be high and with it being C- properties the tenants probably won't take good care of the units. I could be wrong and I could be overanalyzing but that's the only thing I can think of so far.
@Phil Denton you are 100% correct. You must adjust for the area. In my particular case on these houses I am compensating with 10% maintenance and 10% capital costs assumed. Those are pretty high in general. Area should not be as bad on turn over but if you do look at high turnover areas then adjust your vacancy figure accordingly.
I aim for $2,000,000 COC per month with leverage otherwise it's a terrible investment. I won't even consider $1,500,000. We have a strong market. Best of luck.
Just a thought to everyone posting about there cashflow numbers. I鈥檝e been analyzing deals and I鈥檝e been running numbers at different purchase prices. For example if a property is listed at $400k I鈥檒l figure out my CoCROI and Cashflow on that figure, then I鈥檒l rerun the numbers at 25k or so cheaper and so on and so forth. It never hurts to put an offer in on a property below asking price where the numbers and cashflow work for you!
@Dontrea Riser a DEVIATED mindset - cash flow is equal to how much value you can provide to your inhabitants. The greatest value for many citizen's is COMMUNITY, and the feeling of coming home, feeling safe, genuine human connection, and self discovery/improvement. I create those elements in my investments, and am able to enjoy quadruple digit returns while helping build prosperous communities/local economies.
@Dontrea Riser I'm new to this venture and I've read that in 200- 300 usd per month on SFR. However, at least in the Orlando market I haven't been able to find any Good property that can cash flow near those numbers.