What is your cutoff for cash flow/door?

Tax Liens & Mortgage Notes
7yFollow

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.

0Reply
147 views

Most Popular Reply

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
See this reply in the discussion

83 Replies

Jump to latestLatest
  • Alexander Ball
    Reston, VA · Member since 2017 · 67 posts · 68 votes
    7y

    I focus on 10% CoC. I'm buying in C class areas right now and I know I'm in for a ride. Why? I want to focus on real estate full time ASAP. I like my job but I love real estate. If it doesn't work out in C class long term, no problem I'll sell, learn my lesson and change my strategy. Cash flow gives me income to live off of.

    I use income  - (10% management, 5% vacancy, $100 per door per month for repairs, +1500 for other expenses + mortgage/insurance/taxes).  

    0Reply
  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    7y

    @Nathan Hui

    I buy turnkey, fully rehabbed (new roof, new HVAC, new/updated plumbing and electrical, etc.) without any deferred maintenance in Memphis, TN at 1% rule or better.

    I set aside 8% for vacancy, 5% for ongoing maintenance, 5% for eventual cap-ex which is 18% total.

    I use conventional financing with 20% down, 30-year fixed rate mortgages. So, my formula is:

    Rent - 8-10% PM fees - PITI - 18% reserves = cash flow.

    I average about $160/month per unit. The range is about $120/mo to $200/mo depending on the property. So far, these are all SFRs. Hope this helps.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ 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?

    Irr is the only metric.. cash flow is just that .. IRR is a measure of the whole project Cash flow is just one component.

    take the example of a home like what was posted above that never goes up in value or goes down in value.. its cash flows but at exit unless you can 1031 and you probably wont do that because you don't really have any equity to 1031 .. the exit results in a capital loss and a negative IRR

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Dustin Wiskes
    Rental Property Investor · Green Bay, WI · Member since 2016 · 19 posts · 11 votes
    7y

    @Nathan Hui

    I shoot for $250-300/door/month.

    I manage all my properties and do most of the maintenance myself, so these numbers will eventually change once I hire these job functions out. I also have pre-funded a Capex account, so this is not accounted for in the number above.

    A recent side by side duplex (2bd/1.5bth) that I got under contract had numbers that went something like this:

    Purchase price: $140k

    Financed amount (75% LTV): $105k

    Mortgage (4.75%, 30yr): $548/mn

    Taxes: $270/mn

    Insurance: $67/mn

    Total: $885/mn

    Rent @ $725/side

    Cash flow: $565/mn or $282 per door

    Again, you will definitely need to factor in other expenses if you want to have somebody else manage and you should also stock some away for a rainy day, but this will at least give you a jumping off point.

    Best Regards,

    Dustin

    0Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Nate Bell:

    @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.

    Hey Nate, are you including Cap Ex, vacancies, Maintenance, PM, lawn care, utilities, etc. into your CF calculations? 

    0Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Mark Fries:

    @Nathan Hui

    $500-$800 per door

    What is your CF formula? 

    0Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Alexander Ball:

    I focus on 10% CoC. I'm buying in C class areas right now and I know I'm in for a ride. Why? I want to focus on real estate full time ASAP. I like my job but I love real estate. If it doesn't work out in C class long term, no problem I'll sell, learn my lesson and change my strategy. Cash flow gives me income to live off of.

    I use income  - (10% management, 5% vacancy, $100 per door per month for repairs, +1500 for other expenses + mortgage/insurance/taxes).  

    Class C properties seem to be the only properties that I have found to CF decently for me in my area. If you are looking to quit your job why not manage the property yourself? $1500/mo seems like there is no way you could make any money, what's going on with that number? 

    0Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Nathan Hui

    Simple...

    Buy for $30k cash, rehab for $15k cash, rent for $995

    Repeat

    3Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Mark S.:

    @Nathan Hui

    I buy turnkey, fully rehabbed (new roof, new HVAC, new/updated plumbing and electrical, etc.) without any deferred maintenance in Memphis, TN at 1% rule or better.

    I set aside 8% for vacancy, 5% for ongoing maintenance, 5% for eventual cap-ex which is 18% total.

    I use conventional financing with 20% down, 30-year fixed rate mortgages. So, my formula is:

    Rent - 8-10% PM fees - PITI - 18% reserves = cash flow.

    I average about $160/month per unit. The range is about $120/mo to $200/mo depending on the property. So far, these are all SFRs. Hope this helps.

    Last night I watched a video of a property analysis on a turnkey property in Memphis. I couldn't believe the numbers. In general, I think a truly turnkey property at 1% will do well at least from a CF perspective. My issue is that investors in my area seem to be liquidating their portfolios at or below the 1% rule with plenty of obvious deferred maintenance (old HVAC, roof, questionable plumbing, you name it!) and they are trying to walk away with their cap ex and all their appreciation since 08, 09. I don't blame them but it won't work for me. I should consider out of state and other markets. Thanks for including you specific percentage breakdown and CF formula. I like to see how people are doing it. Do you think you will really have a month of vacancy/year? 

    0Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Jay Hinrichs:
    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?

    Irr is the only metric.. cash flow is just that .. IRR is a measure of the whole project Cash flow is just one component.

    take the example of a home like what was posted above that never goes up in value or goes down in value.. its cash flows but at exit unless you can 1031 and you probably wont do that because you don't really have any equity to 1031 .. the exit results in a capital loss and a negative IRR

    Thanks Jay, it is becoming more and more apparent that considerations of appreciation/equity gains are just as essential as making sure there is cash flow. Everybody's goals are different but I personally want the largest gains I can possibly make per each property. 

    0Reply
  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    7y
    Originally posted by @Nathan Hui:
    Originally posted by @Mark S.:

    @Nathan Hui

    I buy turnkey, fully rehabbed (new roof, new HVAC, new/updated plumbing and electrical, etc.) without any deferred maintenance in Memphis, TN at 1% rule or better.

    I set aside 8% for vacancy, 5% for ongoing maintenance, 5% for eventual cap-ex which is 18% total.

    I use conventional financing with 20% down, 30-year fixed rate mortgages. So, my formula is:

    Rent - 8-10% PM fees - PITI - 18% reserves = cash flow.

    I average about $160/month per unit. The range is about $120/mo to $200/mo depending on the property. So far, these are all SFRs. Hope this helps.

    Last night I watched a video of a property analysis on a turnkey property in Memphis. I couldn't believe the numbers. In general, I think a truly turnkey property at 1% will do well at least from a CF perspective. My issue is that investors in my area seem to be liquidating their portfolios at or below the 1% rule with plenty of obvious deferred maintenance (old HVAC, roof, questionable plumbing, you name it!) and they are trying to walk away with their cap ex and all their appreciation since 08, 09. I don't blame them but it won't work for me. I should consider out of state and other markets. Thanks for including you specific percentage breakdown and CF formula. I like to see how people are doing it. Do you think you will really have a month of vacancy/year? 

    No, I don't think that but my calculations are meant to be fairly conservative. One of my PMs charges $200/year for lease renewal, which comes out of the vacancy loss allowance. They also have a 90-day guarantee that if my property goes vacant for 90 consecutive days, they pay me full market rent on day 91. I could probably use a much lower, maybe even half, vacancy loss allowance, but while I'm new to REI and still figuring out the long-term averages, I'd rather be safe than sorry. I plan to buy/hold for a long, long time. As rents increase (hopefully at a rate faster than expenses like insurance and property taxes), these numbers get better over time as the P&I payment stays fixed.

    0Reply
  • Alexander Ball
    Reston, VA · Member since 2017 · 67 posts · 68 votes
    7y

    @Nathan Hui

    Sorry, meant 1500 a year.  It’s for fees like trash, Unit licenses, business licenses, lease renewal from property’s management, etc.  

    0Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Mark S.:
    Originally posted by @Nathan Hui:
    Originally posted by @Mark S.:

    @Nathan Hui

    I buy turnkey, fully rehabbed (new roof, new HVAC, new/updated plumbing and electrical, etc.) without any deferred maintenance in Memphis, TN at 1% rule or better.

    I set aside 8% for vacancy, 5% for ongoing maintenance, 5% for eventual cap-ex which is 18% total.

    I use conventional financing with 20% down, 30-year fixed rate mortgages. So, my formula is:

    Rent - 8-10% PM fees - PITI - 18% reserves = cash flow.

    I average about $160/month per unit. The range is about $120/mo to $200/mo depending on the property. So far, these are all SFRs. Hope this helps.

    Last night I watched a video of a property analysis on a turnkey property in Memphis. I couldn't believe the numbers. In general, I think a truly turnkey property at 1% will do well at least from a CF perspective. My issue is that investors in my area seem to be liquidating their portfolios at or below the 1% rule with plenty of obvious deferred maintenance (old HVAC, roof, questionable plumbing, you name it!) and they are trying to walk away with their cap ex and all their appreciation since 08, 09. I don't blame them but it won't work for me. I should consider out of state and other markets. Thanks for including you specific percentage breakdown and CF formula. I like to see how people are doing it. Do you think you will really have a month of vacancy/year? 

    No, I don't think that but my calculations are meant to be fairly conservative. One of my PMs charges $200/year for lease renewal, which comes out of the vacancy loss allowance. They also have a 90-day guarantee that if my property goes vacant for 90 consecutive days, they pay me full market rent on day 91. I could probably use a much lower, maybe even half, vacancy loss allowance, but while I'm new to REI and still figuring out the long-term averages, I'd rather be safe than sorry. I plan to buy/hold for a long, long time. As rents increase (hopefully at a rate faster than expenses like insurance and property taxes), these numbers get better over time as the P&I payment stays fixed.

    That makes total sense. That is pretty neat your PM will pay you for >3mo vacancies. 

    0Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Mark Fries:

    @Nathan Hui

    Simple...

    Buy for $30k cash, rehab for $15k cash, rent for $995

    Repeat

    Crushing the 2% rule like a boss. Do you do the rehabs yourself? 

    0Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y
    Originally posted by @Alexander Ball:

    @Nathan Hui

    Sorry, meant 1500 a year.  It’s for fees like trash, Unit licenses, business licenses, lease renewal from property’s management, etc.  

    I figured that was the case. Thanks for your numbers, everyone's deal examples and perspectives help me a lot! 

    0Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Nathan Hui

    I do most everything myself including the property management. I figured a long time ago if I'm going to make money in this business I want to make real money so that means I need to do a lot of things myself.

    5Reply
  • Ishmael Carter
    Rental Property Investor · New York Ciry, NY · Member since 2015 · 33 posts · 14 votes
    7y

    I would also be interested in the percentage being used for total expenses. Some say approximately 50% of gross rent but I find that to be very high and greatly reduce ROI.

    0Reply
  • Andrew George Dennis
    Rental Property Investor · Boulder, CO · Member since 2018 · 52 posts · 9 votes
    7y

    @Mark Fries

    Where can you buy a house for 30k? In colorado it costs $140k for a crappy 2 bedroom apartment.

    Are these ghettos?

    0Reply
  • Nathan Hui
    OP
    New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
    7y

    @Ishmael Carter I think most people use the 50% rule to quickly analyze properties’ CF potential. I don’t think people are using that rule of thumb for their final analysis but I could be wrong.

    0Reply
  • Ishmael Carter
    Rental Property Investor · New York Ciry, NY · Member since 2015 · 33 posts · 14 votes
    7y

    I would agree.  It’s a good back of the napkin but it’s not good for go no go

    0Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Andrew George Dennis

    C Class...Jacksonville FL , all day long....

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Mark Fries:

    @Nathan Hui

    I do most everything myself including the property management. I figured a long time ago if I'm going to make money in this business I want to make real money so that means I need to do a lot of things myself. 

    Mark you should do a pod cast..  do it yourself landlords are the one's who make good money in this game that's for sure and those that have zero debt are the ones who end up rich.. not in debt to their eye balls. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    3Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Jay Hinrichs

    BP actually reached out to me a couple months ago and asked me a bunch of preliminary questions and they wanted me to do a Podcast but then I never heard back from them. It's all good, I figured there must be a reason. Sometimes I think I'm too much of a realistic investor or too much of a straight shooter and it might not make for a good Podcast because I'm that way?

    But in the mean time if I can help anybody actually make money in this business and show them the right way to do it I will be more than happy to do that!

    5Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Jay Hinrichs

    It's all about BRRRR nowadays....not hard work and saving equals snow balling rents equals buying with cash equals financial freedom....

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Mark Fries:

    @Jay Hinrichs

    It's all about BRRRR nowadays....not hard work and saving equals snow balling rents equals buying with cash equals financial freedom....

    I did a few thousand BRRRR loans from 2001 to 2008 prior to the melt down.. its not a new concept by any means.

    but it sure is a risky one for someone sitting half a country away trying to rehab low end rentals  I think you can I can agree on how much that risk is.. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free