What is your cutoff for cash flow/door?

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What is your cutoff for cash flow/door?

Nathan Hui
New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes

Hello BP Folks,

What is your cutoff for cash flow per door? This is more of a poll. No need for explanation or rationalization but feel free to elaborate if you like.

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Ben Zimmerman
Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
7y

Personally I don't care about cashflow.  I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth).  Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth.  I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.

For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:

If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.

Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home.  While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases.  At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.  

Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years.  Expand this horizon to 20, 30 or 50 years and the numbers become insane.  

People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.

Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything.  But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.  

Cashflow allows you to retire, but growth rate lets you build an empire.

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  • Tim S.
    Investor · California, CA · Member since 2016 · 367 posts · 375 votes
    7y

    Depends on your objective. I want to minimize taxes, so I’m happy if the property pays for itself with little cash flow. Especially on higher end properties B+ or above in appreciating markets. 

    For lower end properties in flat markets I’d be more concerned about Cashflow, and would want at least $200/mo  

    13Reply
  • Mike Roy
    Rental Property Investor · Bath, ME · Member since 2014 · 220 posts · 288 votes
    7y

    @Nathan Brooks - I like to see at least $150/door to protect against the downside risk that rents could decrease or that some expense could suddenly spike, like water/sewer or tax rates.  If I'm at $150/door, I feel like some unexpected bad things could happen and still provide a reasonable chance to break even. 

    That said, I also look very closely at cash on cash return, i.e. what I'm paying for that $150/door.  I think it's important to keep both metrics in mind.  If I buy a fourplex that produces $150/door, $600 total and $7,200 annual, I want to get to that number with a $60,000 investment, not $120,000, for example.

    I would just note that most good deals I've seen do not provide any cash flow on Day 1.  There are usually things that need to be done on both the income and expense side to create the cash flow.  So when I consider cash flow, I look more to what the finished product will produce and what that finished product will cost.      
     

    14Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y

    @Tim Simmons That is helpful. It seems risk and Cash Flow need to be proportional.

    1Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y

    @Mike Roy So $150/door and roughly 10% Cash on Cash ROI. I like to hear that you are not finding anything on the market that will produce these numbers for you. I'm not either! I am finding most investors are selling at or below the 1% rule with a nice heap of deferred maintenance. I don't blame them but my numbers just can't get there.

    So it sounds like you are doing some renovations which forces appreciation and raises your rental income. How are you modifying your expenses? And what kinds of properties do you generally acquire?

    1Reply
  • Account Closed
    Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    @Nathan Hui

    I think BP needs to make it a requirement that anytime someone posts about their cash flow, they have to note the following things:

    1. Their market

    2. Their CF formula

    Without those 2 things, it's like comparing apples-and-oranges.

    22Reply
  • Josh Darley
    Rental Property Investor · Chandler, AZ · Member since 2019 · 39 posts · 21 votes
    7y

    I've bought two condos recently 120k in Phoenix area that cash flow $350 from day one. Bought them both with 15 percent down. The cost of rent has risen dramatically over the last couple years. Over 20 percent COC return.

    7Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Nathan Hui

    $500-$800 per door

    7Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y

    @CJ M. Ok, you win.

    2Reply
  • Danielle Wolter
    Rental Property Investor · San Diego, CA · Member since 2019 · 290 posts · 254 votes
    7y

    It depends on the market. Here in San Diego, my properties have very low cash flow after debt service (one is negative - let's not talk about that right now) but in a market like Memphis (where I have been looking for properties), I look for $200 after debt service.

    It also depends on your goals and risk aversion.

    1Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y

    Please state your market and class. Also, how you calculate CF.

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    IRR 25+%

    2Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    50% or better of rent to P.I.

    0Reply
  • Cody DeLong
    Gorham, ME · Member since 2018 · 280 posts · 186 votes
    7y

    I look to cash flow $100 per door after everything (Debt Service, Capex, Repairs, PM) on a BRRRR property. Working on one right now that will be cash flowing $103 per door once I pull out my cash, possibly more depending how rates go from now until January when I can pull a HELOC. I only plan on owning the property for 4-5 years along with my other few duplex's to earn some equity in it and then 1031 into something bigger.

    2Reply
  • Brent Crosby
    Rental Property Investor · Farmington, UT · Member since 2018 · 171 posts · 148 votes
    7y

    @Mark Fries where are you finding that? That sounds way too good...

    1Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Brent Crosby

    Jacksonville FL & C class properties

    2Reply
  • Ben Zimmerman
    Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
    7y

    Personally I don't care about cashflow.  I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth).  Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth.  I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.

    For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:

    If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.

    Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home.  While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases.  At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.  

    Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years.  Expand this horizon to 20, 30 or 50 years and the numbers become insane.  

    People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.

    Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything.  But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.  

    Cashflow allows you to retire, but growth rate lets you build an empire.

    26Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Mike Dymski:

    IRR 25+%

    I had to laugh a little to myself when I saw this. After the last post on CF vs ROI I'm sure you are disappointed to see I didn't ask what people's cutoff for IRR is. And after reading the responses it feels like that is the direction this is heading. I'm not going to lie, IRR seems like a beast to calculate into my first investment. For me cash flow is a hard enough calculation. I have no experience with actually dealing with capital expenditures, property management, and maintenance expenses. I lack confidence in my estimation abilities since I have no actual investing experience. Do you think I should make IRR an essential part of all my deal evaluations?

    1Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    @Nathan Hui

    There are tons of people on here that look for $1-200/door. No thanks. Not worth it to me. I’d rather sit back and wait for a deal that makes sense and makes real cash flow.

    8Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Ben Zimmerman:

    Personally I don't care about cashflow.  I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth).  Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth.  I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.

    For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:

    If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.

    Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home.  While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases.  At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.  

    Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years.  Expand this horizon to 20, 30 or 50 years and the numbers become insane.  

    People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.

    Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything.  But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.  

    Cashflow allows you to retire, but growth rate lets you build an empire.

    I have such limited experience. I think I need to pursue the safer option at least initially. That is probably why cash flow is such a concern for me. It is helpful to see how cash flow alone can fail to provide the best return. Thanks Ben!

    5Reply
  • Andrew George Dennis
    Rental Property Investor · Boulder, CO · Member since 2018 · 52 posts · 9 votes
    7y

    Ok I'm very green - I only own two rentals and I'm trying to learn how to become a landlord correctly - trying to follow the Bigger Pockets books on being a landlord, so screening tenants etc.  That being said, at this point $100 per door sounds crazy when you take into account all that can go wrong with tenants.  Is it just me?  If you have to replace the carpet, some plumbing, and then a few maintenance items, how are you making any money?  Or, after all the repairs, vacancies and repairs, maybe your saying you clear $100/door.  If that is the case, then what would the monthly cashflow be on a unit which is rented and has zero additional expenditures for that month.  I know that will vary a lot on the property, but what percentage of cashflow do you assume goes to expenses, repairs, legal fees, and updates?  To the OP, make sure you factor in being a professional landlord. I was not and now I'm spending 15K to fix a condo trashed by a long time renter and which also needed updates.  These cashflow numbers only work if you do the managing correctly.  That was a lot of profit I gave back.

    To the comment made by Ben Zimmerman, I've made way more money on appreciation than monthly cashflow.  

    1Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    $100/door

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y
    Originally posted by @Nathan Hui:
    Originally posted by @Mike Dymski:

    IRR 25+%

    I had to laugh a little to myself when I saw this. After the last post on CF vs ROI I'm sure you are disappointed to see I didn't ask what people's cutoff for IRR is. And after reading the responses it feels like that is the direction this is heading. I'm not going to lie, IRR seems like a beast to calculate into my first investment. For me cash flow is a hard enough calculation. I have no experience with actually dealing with capital expenditures, property management, and maintenance expenses. I lack confidence in my estimation abilities since I have no actual investing experience. Do you think I should make IRR an essential part of all my deal evaluations?

    There are likely experienced investors with portfolios who have never heard of IRR. Some stuff you just have to figure out along the way. Just include cash flow, principal reduction, and some conservative estimate of appreciation (if applicable) in your analysis and you have all the inputs

    5Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    I am in the @Ben Zimmerman camp but would not go as far as saying I do not care about cash flow. I evaluate my purchases on ROI. If a purchase can return 50% with 0 cash flow then that is an investment worth pursuing. If it needs the cash flow to surpass my ROI threshold then it still provides the return I seek. I will make more off of value adds and appreciation than I will make off of cash flow and I state this even though we have 2 units that have cash flow of ~$5K/month unit (after all expenses including maintenance and realistic cap expense estimates). It raises the question of how much have these two units' value risen if I will make more on the appreciation than on the CF? CF is just one aspect that determines it an RE is a good investment and for me I place it lower than expected conservative appreciation and lower than a significant value add.
    0Reply
  • Nate Bell
    Member since 2018 · 151 posts · 140 votes
    7y

    @Ben Zimmerman

    You nailed it. Couldn’t say it any better. Folks on here scoff that I cashflow $200/door on a $350k property, but it appreciates 5% per year. $200/month is practically meaningless to me; that’s noise for me at this point with 6 properties and a good paying job. $17k/year in appreciation? Yes please, more please.

    The haters will say that you can’t bank on appreciation, but that’s like saying you can’t bank on the stock market going up at an average rate of 7%. I have a $200k property that loses $100/month, but has appreciated $60k in the 5 years I’ve had it. You do the math.

    5Reply
  • Jeremy Holcomb
    Rental Property Investor · Somewhere · Member since 2019 · 104 posts · 48 votes
    7y

    A minimum of $300/door after all expenses and savings for future expenditures. 

    1Reply
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