How much cash flow are you looking for?

Question

Hi everyone.

I purchased my home about 4 years ago with the VA loan so I didn’t put any money to move in.. I am currently in the process of purchasing my second home with about 40k in equity on the first.. if I rent this home out I will cash flow about $200 a month.. is that a deal considering I put no money in? Or am I better off selling? I have probably spent about 10-15k over the 4 years in upgrades and updates on the home since we have been living in it.

What’s the cash flow personally look for?

David Pere · Answer

You could go either way with that Daniel. If you walked away with $30k after selling you could probably earn more than $200/month with it, but if the property keeps appreciating, and paying itself off, without you having any money in the deal, that is a win in my book!

Ultimately, you need to determine what your long-term goals are, and decide which route will better help you achieve them.

Kris L. · Answer

@Daniel Zamora

Depends on which market.  I invest in 2.

One, where I can expect little appreciation, on the order of 1-2%.  That market, I require $200/ mo cash flow minimum.  If I can’t get that, I might flip the property instead of holding.

My other market has appreciation on the order of 5-10%.  In that market, I can tolerate a cash flow down to 0 (though I try for $100) because my equity gains are what I am after.

Greg M. · Answer

Contrary to popular belief on these forums, cash flow is a meaningless number. It can be manipulated and doesn't tell you anything about the overall profitability / wealth building aspect of your investment.

FCF is $200/month - great! What about principal reduction and appreciation?

Clint Shelley · Answer

@Daniel Zamora

If that property is in a state or area that will continue to or possibly achieve appreciation, that's you best play. In the long run, that's going to outrun the cap ex and occasional por tenant. Good to have a mix in your portfolio but how many times have you heard where an old-timer bought some land or a building that everybody thought he was crazy and he likely made no cash flow but when he retired he sold it for a mint. That's the difference.

Clint

Dan H. · Answer

I look for total return as @Greg M. implied.

I would not choose to have a unit if it were only producing $200/month return.  Too much work for that return when other options exist.

In 4 years you have achieved $40K of appreciation and equity paydown, but you were paying for the equity paydown.  As a rental with $200 positive cash flow, the tenant will be paying the equity paydown.

I am going to assume your $200/cash flow projection is accurate and that you properly accounted for vacancy, maintenance/cap ex, PITI (Principle, Interest, Taxes, Insurance), Property Management, and miscellaneous costs.

If the unit performs for the next 4 years similar to the last 4 years, not including compounding or rent growth, this is what the return would be:

$40K + $200 * 4 * 12 = 49,600 or an average of just over $1k/month.  Not bad.

In reality, if the next 4 years is like the last 4 years it will do better than depicted above.  Why?  There would be rent growth.  There would be compounding on the appreciation.  The equity paydown accelerates as the principle is paid down.

I think most people would be happy with over $1K/month return on something that you invested nothing to start.  I realize you have put in $10k to $15K, but this would be allocated in your maintenance/cap ex budget that is already accounted for (hopefully you estimated conservatively).

I have purchased a cash neutral RE.  It has produced far better return than calculated for your property.  Cash flow is just one of the items that determines your return.

When you start as an RE investor, cash flow is often necessary to cover expenses (and you forecast positive cash flow so your expenses should be covered).  When expenses are covered, wealth creation become more a priority than cash flow.  It is why I purchased a projected cash neutral property.  I believed correctly that there was a good value add opportunity and that it would appreciate significantly.  The value add and appreciation on that purchase both exceeded my forecast.  In fact, the appreciation on every one of my purchases has exceeded what I used in my pro forma for the property.

Good luck

Carl C. · Answer

Single family house, for us nothing less than $1,000 per month is worth it. Lots of people would take $200 per month cashflow. You need to decide for yourself if $200 is going to be worth the time it will take you each month to manage it. Maybe yes, maybe no.

How much cash flow are you looking for?

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