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

    @Jay Hinrichs

    Its crazy risky... So many out of state investors hire me to do the rehab on properties that they purchase trying to follow this method and then I just see it unfortunately imploding on them.. It definitely works but it's a very small percentage and that's what nobody talks about..or seldomly talks about... I own 48 single family properties and 2 small multi families and I've never financed any of them or pulled out equity... I've never actually financed anything in my life except for 2 vehicles 15 years ago and my home that I live in and that's just because I had it financed before I got into the game... I just don't think it would make a very good Podcast?.... I read a book 6 years ago called the "weekend millionaire" and it changed my life forever...

    6Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    @Tim Simmons you’re happy to make less profit because your taxable income is smaller? Do you have other money losing or break-even investments you can recommend?

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

    @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!

    Mark, you do property management in class C. You can count on me reaching out to you for everything PM when I get closer to closing on my first deal. You know any literature I should check out?

    0Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    @John Morgan why are people taking about cash flow per "door" without talking about the ARV per door to make it a halfway relevant metric

    0Reply
  • Mark Braun
    Rental Property Investor · Monterey, CA · Member since 2014 · 23 posts · 11 votes
    7y

    @Tim Simmons I second that thought!

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

    @Nathan Hui

    Skip the literature, just reach out to me when you are ready...i can tell you how it really works out here...lol

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

    @Steve B.

    I'm more concerned about ARV than cash flow. I prefer at least $200-$300/door with 15 year loans. However, if the ARV is really high, then I'm good making only $100/door. My latest property I just bought in June only cash flows $100/month. But it's in a great up and coming location and the ARV is really good.

    0Reply
  • Toan Hoang
    Member since 2018 · 50 posts · 25 votes
    7y

    @Nathan Hui

    After you have read all these comments there is no clear answer. It all depends on so many factors. In my opinion its good to have a good mix. Some properties might be cash cows in areas with low appreciation while others might be break even in high growth areas. For me personally i think its good to have both.

    For example i made a concious decision to purchase a 3 unit that yeilds $1000 a month after debt tax, ins in order to help pay some of my daughters college. If i didnt need that monthly cash than maybe i would have settled for less cash per door and more long term equity.

    0Reply
  • Thomas Murray
    Flipper/Rehabber · Greater Bosto, MA · Member since 2018 · 38 posts · 5 votes
    7y

    Ben zimmerman shows how stock mrkt investors look at stocks. Some invest for growth-increased stock value, others for cash flow- dividend earnings. The long term and short term viewpoints on investing.

    0Reply
  • Matthew Poulton
    Investor · Scottsdale, AZ · Member since 2017 · 3 posts · 1 vote
    7y

    @Joshua D. Hi Josh, that sounds like pair of properties there! Question (and happy to chat via direct message) though, what is your cash flow formula?

    Thanks!

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    7y

    I think this metric is totally irrelevant.  Is your acquisition $50k per dorr or $200k per door?  That will drastically affect your answer.  I look at cap rate and cash on cash as my defining metrics

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  • Michael A.
    Investor · Richmond, VA · Member since 2016 · 164 posts · 114 votes
    7y

    @Nathan Hui I care only about rate of return. If the % ROI I am making on my money would beat the securities market significantly than I consider that property a strong buy. You can't just look at cash per month. $200/mo for instance might sound great, but how much did you invest to make that $200/mo?

    1Reply
  • Mike Celli
    Washington, DC · Member since 2019 · 81 posts · 38 votes
    7y

    @Mike Roy this is a great way to look at CoCR

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

    @Toan Hoang I agree both CF + Appreciation is ideal. Even though there is no consensus on CF numbers I am still learning a lot from hearing each investor’s strategies, how they calculate their numbers, and what their goals are. I was hoping for more of poll type thread, but I do now realize that CF is calculated differently amongst investors. Also, I realize CF does not represent their entire investment’s earning potential and in some cases CF has little to do with a solid investment.

    0Reply
  • Cody Ruff
    Rental Property Investor · Evansville, IN · Member since 2019 · 41 posts · 24 votes
    7y

    @Nathan Hui I go with the Brandon Turner numbers which is 100 dollars per cash flow per unit for a rental unit and 200 dollars of cash flow per month for a rental residential property. Those are bare minimum numbers for a cheap house definitely be looking for more if the house is more expensive

    0Reply
  • Jonathan Beckett
    Rental Property Investor · Martinsville, VA · Member since 2019 · 14 posts · 1 vote
    7y

    @Tim Simmons when you reference “ b property “....... is there a particular rating system that you come up with a,b,c etc?

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

    I think this metric is totally irrelevant.  Is your acquisition $50k per dorr or $200k per door?  That will drastically affect your answer.  I look at cap rate and cash on cash as my defining metrics

    Wouldn't you say you still are calculating CF on each deal? I do realize CF is an incomplete part of deal analysis but you can't even determine your COCROI without it... 

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

    @Tim Simmons when you reference “ b property “....... is there a particular rating system that you come up with a,b,c etc?

    I am interested to know also.

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

    @Nathan Hui I go with the Brandon Turner numbers which is 100 dollars per cash flow per unit for a rental unit and 200 dollars of cash flow per month for a rental residential property. Those are bare minimum numbers for a cheap house definitely be looking for more if the house is more expensive

    I like it! Seems appropriate, I haven't seen anybody go lower so far. 

    0Reply
  • Jonathan Beckett
    Rental Property Investor · Martinsville, VA · Member since 2019 · 14 posts · 1 vote
    7y

    @Mark Fries ..... new to this. How do you determine the class of property? You mentioned “c” property.

    0Reply
  • Tim S.
    Investor · California, CA · Member since 2016 · 367 posts · 375 votes
    7y
    Originally posted by @Jonathan Beckett:

    @Tim Simmons when you reference “ b property “....... is there a particular rating system that you come up with a,b,c etc?

    Google it,  Here's one:


    https://www.realtymogul.com/knowledge-center/article/what-is-class-a-class-b-or-class-c-property

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

    @Jonathan Beckett

    Great question! To be honest I dont really know....for me personally its blue collar workers that cut the grass more than 1 time every 60 days and walking the sidewalk at night is not life threatening...that C class to me....lol

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    7y
    Originally posted by @Nathan Hui:
    Originally posted by @Brie Schmidt:

    I think this metric is totally irrelevant.  Is your acquisition $50k per dorr or $200k per door?  That will drastically affect your answer.  I look at cap rate and cash on cash as my defining metrics

    Wouldn't you say you still are calculating CF on each deal? I do realize CF is an incomplete part of deal analysis but you can't even determine your COCROI without it... 

    Of course, but comparing cash flow per door when the acquisition price is variable is an irrelevant metric

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    Second City Real Estate4.821 Reviews
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    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    7y

    @Nate Bell

    Your building long term wealth and looking at the overall big picture. I agree completely. You don’t bank on appreciation just like stocks but look at the past 25-30 years in major markets and you can get a sense for minimizing risk by investing in those that have a history of increasing vs those that do not.

    Truth be told it’s no different than cash flow- can anyone predict cash flow ? The answer is no as you cannot predict if the tenant will pay or if the refrigerator will break. Similar to appreciation you can minimize risk by having high credit renters and updated homes. I find a lot of people only look at numbers and not the risk involved especially in lower values rentals where you can buy a rental for $30k and rent it for $600-$800.

    Similar to you I have two rentals near Washington DC that have had very little cash flow over the 6 years I owned them but they have appreciated by 50% and my tenants are paying my 15 year mortgage.

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  • Cassidy BurnsBusiness Member
    Investor · Alexandria, VA · Member since 2016 · 860 posts · 460 votes
    7y

    I feel as it is common practice for most investors who are just getting started to be attracted to the "cash flowing/cash cows."  I was definiltey one of those investors.  Finding/ buying anything that would "allow me to retire by the age 30" and I personally think that is the one negative about Biggerpockets.  It had me so anxious to chase cash flow.  

    BUT.....

    Buying those properties taught me great great lessons and I still own all of them today, and has allowed me to progress in my investing career.  I will eventually sell most of them and do 1031 Exchanges once the time is right, but the fact of the matter is , I have to wait for the forced appreciation and the slow slow equity pay down from my tenants to do this for me.  These lower income rentals that are "cash cows" will never appreciate, and could potentially depreciate.  So I am collecting the cash flow now, allowing my buying power to slowly increase due to Net Worth Increase and experience build up, which is allowing me to purchase higher "value" property.

    I think it all comes down to reaching your NOI goal. How you get there is up to you. IF you want / need lets say $250,000/ yearly income , then you have to find a way to generate $250,000 NOI / year. Whether that is through 500 rentals, 50 rentals, or 1 unit (maybe you own a high end AirBnB somewhere), again everyones strategy is different.

    Good luck and happy investing!  

    [email protected]540-960-1507
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