The Myth of Cashflow – and understanding how to reserve properly and model.

[David Lutz]

Let me start by saying I am all in on RE. I have an MBA, spent years learning about RE before I pulled the trigger. And when I did, I bought 5 houses worth over $1M in 18 months with only $100K of my own money. So I feel pretty good about saying I am financially literate, know how to model, and to find deals purchasing out of state.

I’m also embarrassed to admit I was so focused on getting going that I just assumed I could track if I was doing well by watching my bank balance. That was dumb. To be fair, in addition to buying all those houses over the last 3 years I also dealt with an eviction, $47.4K in capital expenses, insurance claims, building teams in my local markets, and all the other nonsense involved in this lovely industry.

Anyway, I finally got around to putting together a complete general ledger and had the horrible realization that over the last two years (bank and credit card record limitation make it harder to go back farther)…

….. between 2022 and 2023 I have been $17.5K cash flow negative on $171K expected rent !!!!!

How the **** did that happen? I budgeted 21.2% of the expected rent toward vacancy, maintenance, and CapX, and in reality I ran at around 27% in the last two years. Also,.. why am I telling you? I figure that I’ve gotten so much from everyone at Bigger Pockets, and there is so little information on the hard numbers of how non-professional investors do, that I should give something back. Because most of the tools you have access to are a figment of imagination pushed by self-aggrandizing gurus and the Real Estate industry … because they only make money when you’re buying.

Again, let me stress I've made a lot of money over the last 3 years. I think you should buy real estate, I just want you to be smart. One of the major dangers is caused by the bizarre reality distortion field people have regarding the term cashflow. It seems like a lot of people use the term cashflow to refer to how much net income they average per month with no (or minimal) reserving or debt servicing. And the per door numbers sound huge, which is great but also meaningless. Because, reality check, if you think you're clearing $500 per month over 3 years ($18K) but you end up with one $5K Cap Ex cost, $4K in vacancy, and $3K in random maintenance then you're really only averaging $166 per month ($6K). And if you borrowed money for your downpayment from a HELOC, personal loan, cash out refi, 401K etc., then your hidden debt servicing can take your cashflow negative in a heartbeat. Rosy assumptions about how much free cash your real estate investment is going to throw off make it really easy to be unrealistic about what it's going to take to make owning rentals actually work.

So, 3 years into my Real Estate journey (5 with planning) I have some learnings I want to share:

• The default assumptions in every calculator you look at are rosy at best and complete lies at worst. Unless you buy a brand new house there is probably deferred maintenance. Your costs are going to be higher than you expect in the first few years. Plus, you’re not a professional. There is a high likelihood that you’re going to end up paying slightly more than you should for repairs, and turning houses when tenants leave is going to take longer than it should.
  • -- I’m sorry. I know you think you’re awesome. You’re not. Bleeding money that a pro wouldn’t is just going to happen. It’s better to anticipate it.
  • -- My recommendation is 25% of rent to cover vacancy, maintenance, and Cap X for older homes (+20 year), 20% for middle age (5 to 20), and 15% for new homes (you’ll need it eventually). I’m running hotter than that, but I honestly believe that I’ve caught up on deferred maintenance and these numbers are good for the long run.

• Have a plan for dealing with getting it wrong. I started with a $20K reserve. In addition to a strong W2, I have a HELOC to lean on. I stopped fed tax withholdings because the penalty is cheaper than borrowing cash, which buys a year (I still pay my taxes in full). In a pinch I can borrow against my 401K. And if things ever went truly sideways I could sell a house.

• Leverage is awesome. I borrowed 90% of the money for the homes I purchased at an average of ~4% interest. But the higher your leverage, the more likely you’re going to be cashflow negative. You’re going to make more money with more leverage, but only if you can handle the debt service. Don’t overextend yourself.

• As insane as it sounds, going all in actually helped. The rent from 4 houses covered the mortgage for 5 over the last 18 months I’ve been dealing with an appealed eviction and the court collecting and holding the rent.

• Everything I bought rented for 1% to 0.65% of the initial purchase price (more now). And the 1% has been the biggest headache. So if you go for cashflow you better be on premises, because there are going to be issue to deal with. And if you go for appreciation/quality houses you need to have a plan for dealing with weak cashflow.

• For pity sake don’t turn on water service on a Friday. My buddy and I have both ended up with minorly flooded houses despite the property managers telling us that all the taps had been turned off.

• If you’re buying out of state, ask potential property managers if they have local staff on site or if they outsource their inspections to a vendor (common for larger PM companies).

• When I model returns, I assume appreciation on B-/C+ properties at 1% above inflation. I did a lot of research, long term that’s a safe assumption. Rent I assume tracks with inflation (which is still great because a lot of your costs are fixed). This is probably a bit conservative, but I think it’s generally accurate, and I only like good surprises.

• You have to be able to get +$1000 per door to use a property manager, less than that and the minimums they charge start screwing up your returns.

• Water heaters, etc. cost roughly the same everywhere - it’s closer to a fixed cost. Buy where taxes are low on rental properties, populations are growing, economies are growing, and there are at least two of the following: Gov spend, Major healthcare, transportation hubs, universities, sports teams, industry concentration, tourism, manufacturing. These drive jobs, the more there are where you buy the better and more stable your investment.
  • -- If you’re as nuts as I am read the local area development plans and research planned corporate and other investments. Building an amazon hub and a zoo to the east of the city along with a new planned transit rail line? Awesome.

• Offer what you have and ask for help (preferably in that order). I did some financial modeling for an RE Agent I wanted to build a relationship with, and a year later he gave me some great recommendations on local tradespeople. During a friendly conversation I asked one of my property managers for recommendations on areas with the most growth potential and ended up buying two homes there.

• LLC get expensive if you're thinking of opening one for every property, plus it's a lot of work to make sure they can't be pierced. Consider just getting an umbrella insurance policy.

• Interest only HELOC are only just interest until you hit the repayment period, so make sure you're ready for the increase when you start paying back principal. Also, some lenders have limits on how many mortgages you can have and qualify for a HELOC. So if you think you might want one, set it up early.

• Current taxes on the property you buy generally lag current market value, and in some cases taxes on rental properties are higher than owner occupied. That’s all going to get corrected when your purchase triggers a reappraisal. So put together some realistic tax estimates before you buy.
  • -- All the info you need is available online from the local assessor, and pay attention to what the local community has tacked on to the mill rate. Taxes for two houses twenty minutes apart can be wildly different.

Major costs over last 3 years on 5 homes:

• $10K in missed rent leading to and waiting for eviction
• $3K Eviction costs (lawyers, travel, writ, etc.)
• $2.5K additional lost rent due to 4 month instead of 2 month property turn
• $3.8K for a new furnace
• $7.4K for a new HVAC
• $700 for a bathroom re-pipe
• $12K turn on large home, included new high quality carpet and full repaint
• $5.5K in unnecessary plumbing issues caused by tenant in eviction (no way to recover costs)
• $1.5K in utility bills during vacancy or owner responsibilities
• $900 for a refrigerator
• $4.8K for concrete piers to shore up a foundation
• $5.6K for a roof (insurance claim)
• $5.2K for another roof
• $1.3K for new AC line set (punctured in second roof replacement)
• $1.6 for a water heater
• $1.3 for a water heater
• $2K for a water heater
• $1.7K for new water line from meter to house
• … this actually isn’t everything but I’m getting depressed.

That’s $70.8K which was money that never made it to me, I didn’t expect to spend, or thought I had more time. And this is separate from regular maintenance my property management companies took care of and deducted from the rental income.

So the moral here is that RE is great but you can’t depend on cashflow. If you buy class C or D properties you are going to have way more issues than you can ever anticipate on paper. And if you buy class A or B you’re banking on appreciation. Either way, buy and hold is a long term play and it’s not going to throw off lots of cash in the short term. I’m guessing my year 4 is going to be pretty good, but it’s taken that long to get everything stabilized.

And If I decide to pull equity out to buy more houses, it extends this issue. I would end up with cash to buy more houses, but my monthly debt load goes up and cashflow goes down. So dream of equity and forget about cashflow,... its just a myth.

* These are just my personal beliefs based on my experience. If you hadn’t guessed I am not a RE professional (you probably aren’t either), and that’s kind of my point. I think it’s way too easy to over estimate investment performance based on how well the pro’s do. So don’t take any of my opinions as anything more than that. Make sure you do your own due diligence on your own deals.

**and if you find this info useful vote the post up. I'd like for folks to be able to find this kind of detailed info more easily.

[Dan H.]

Quote from @Steve Smith:

Quote from @Devin Scott:

Quote from @Steve Smith:

Quote from @Devin Scott:

Quote from @Steve Smith:
NEVER ReFi anything! Every time you do that, you loose money. 

Strange take.  That's not how finance works, though.  By that logic, you should never use leverage in the first place.  There's no actual difference between a house you've owned for 20 years and just re-levered and a house you just bought with a new mortgage, all else being equal.

Devin,

There's a LOT of difference! The 20yr house should be cash flowing handsomely! Why kill that income stream with a refi? If you need cash, borrow against the equity if you have to. Don't kill a good note (assuming you had a good note when you bought).

There's on case where one might want to refi, and that's if you bought a property that had bad debt on it from the start...pay that off with a new note. And there's ways to do that without much risk using a joint venture with other investors. Give them a piece of the deal if they pay off the bad loan. That can work well for both of you. I have worked both sides of that deal and works well.  

No. There is literally zero difference between a house you just refinanced at 80% LTV and the same house if you buy it today with 80% LTV. I'm talking post-refinance. "Why kill that income stream with a refi?" Well that applies to new acquisitions as well, if that's your thought process. A new deal is also theoretically cash flowing handsomely.... unless you use a mortgage to buy it, lol. Any mortgage of any type kills cash flow. So why do it? I don't think I need to explain that on this board.

Again, the fact that you've owned the house for a long time makes no difference.  There's nothing inherently different about re-leveraging a property versus a brand new mortgage.  In both cases you're keeping more of your own cash and paying a bank interest to do that.  But if you're making the assumption there's a low-interest mortgage in place, so why refi that out, then yea that's a little different.  But if you've held for 20 years that mortgage is going to be next to nothing anyway.

Whether you are buying a new place or evaluating your own portfolio, if you value current cash flow over leverage to allow you to buy more properties, then you shouldn't have any debt whatsoever.  No argument on that point.

 There's a BIG difference in a refi and a new a acquisition. There are many more ways to structure a purchase than a refi, and often at mush lower cost. And where are you getting the money for a refi? Don't tell me you still use banks.. ugh? Private money, use it for a purchase, not a refi.

Like I said, why would you kill a nice cash flow with a refi? Isn't the cash flow what we want for the betterment of our lives?

And you can certainly have good cash flow and leverage and still go out an buy more. I could argue a balance makes sense.

Highest ROI, especially in markets that appreciate faster than inflation, is achieved at highest leverage. The cash flow in these markets cannot overcome the return from appreciation.

Over time equity pay down and inflation reduce LTV (lower leverage). To maximize return requires occasionally extracting value. A cash out refinance provides a fixed rate, low cost way to extract value to increase leverage.

The risk is being over leveraged or not diversified when needed.   Do not be that investor. 

Highly leverage but not over leveraged, diversified investments. 

Good luck

[Katherine Chinelli]

Quote from @Steve Smith:
David,

Wow, is all I can say. You got some bad training and headed down the wrong path. You don't need 5 houses, you need ONE good one, PERIOD. Buy local, manage it yourself and LEARN the house investing business. Get a GOOD quality house, and a GOOD quality tenant. Have the tenant do the basic maintenance as part of his lease. Let him pay you monthly ON TIME, or AHEAD OF TIME, without fail. If you give him a good deal on a great house and you get a qualified tenant, he will do this for you.

THEN, buy house number two next year. Repeat this over and over again. If you do it right, it will be easy and you should create about $1M in net worth in 10 years. As time goes on, sell your worst rental and replace it with a better one. NEVER ReFi anything! Every time you do that, you loose money. As time goes on, pay off your small loans and end up with free and clear houses.

Once you have 10 free and clear houses you can live off of them debt free for the rest of your life. If you want to live a bit higher on the hog and buy expensive stuff, get 15 or 20 or a few more, but do it with the same formula as above.

You don't need 100s of houses. I cringe when I hear about folks that bought 100 or 200 or 1000 houses. Makes NO sense. I keep reminding myself: KEEP IT SIMPLE, STUPID.

And, YES you can do subject too's and seller financing. 90% of mine are that way. And lease options to sell work great.
Just learn how to do it right. And you don't have to do repairs and remodels yourself (unless you like to work for low wages and sweat). My hammer is for cracking open nuts, not remodeling.

Just food for thought....

 I love this philosophy. Clean, simple. Thank you for this valuable path. I appreciate your wisdom!

[Henry Lazerow]

I make around $3500 a month net cashflow from highly leveraged brrrs but some 6 years old and this is factoring in reserves all the random repairs etc. The cashflow comes. Avoid c class houses if dont have your own team. A/B 2-4s have pretty much 0 tenant issues, if you ever have an eviction it means your in a bad area. On my northside chicago units I have never even had to give a late fee in 6 years. 

[John Warren]

@David Lutz this is a really great post because you mention that you would still buy the real estate! The hardest part for most newer investors is getting started. Given a proper time horizon, I don't think most folks lose money, but in the short term real estate is a terrible "quit your job in 2 years with no money" strategy. 

I have found that the best way to mitigate risk is to either become a real professional, or to invest in nicer assets as @Henry Lazerow mentioned. For the average investor with a high W2, the nicer asset strategy will win in the long run since the C class buildings require so much more brain power and focus. Of course, C class is where you find the real cash flow if you can become educated enough on how to run them. 

[Kyle Joseph]

Great post. There is risk to investing in real estate, and you can mitigate a lot of that risk by underwriting the property correctly. So that you "make your money on the purchase". Others have pointed out the differences between Class A vs B vs C properties. You should be underwriting repairs, bad debt, vacancy, etc. differently for these types of properties. Things like the 1% rule and other metrics are a good initial barometer, but there is a lot of nuance to these properties. Even if they are small multi or SFR. If you're not sure whether you are appropriately capturing costs for a property, the forums are a great place to get a second opinion. I'm always happy to take a look and provide an opinion as well.

[Jay Hinrichs]

Quote from @Kyle Joseph:

Great post. There is risk to investing in real estate, and you can mitigate a lot of that risk by underwriting the property correctly. So that you "make your money on the purchase". Others have pointed out the differences between Class A vs B vs C properties. You should be underwriting repairs, bad debt, vacancy, etc. differently for these types of properties. Things like the 1% rule and other metrics are a good initial barometer, but there is a lot of nuance to these properties. Even if they are small multi or SFR. If you're not sure whether you are appropriately capturing costs for a property, the forums are a great place to get a second opinion. I'm always happy to take a look and provide an opinion as well.

No question about it.. U cant use one set of numbers on all asset class's..  generally speaking your total cost of ownership of a C  class compared to A class is going to be more when it comes to turn over costs  cap ex caused by tenants  etc etc

[Carol Burns]

Wow wow wow!!!  I have been thinking along these same lines for a few years now.  I couldn't for the life of me figure out how to make the cash flow work all the time, long term.  Especially after needed renovations  (just carpet and flooring) that took a huge chunk out of several years of cash flow.   All repairs and maintenance are so expensive now, just a few of them can wipe your cash flow out for a year.   BUT am I glad I own my little rental properties?  YES!  I consider them a hedge against other investments, NOT as a cashflow cow.  As a matter of fact, I put most of my monthly cash flow into a bank account reserved just for those properties for upcoming expenses.  And another thing I couldn't figure out was that yes, I could borrow more money against the properties to make the repairs  or buy another property, but how does that really help when I now have less cash flow from the original properties?   I think trying to figure all of that out and predict cash flow is really kind of going down the rabbit hole.  It'll make you crazy sooner or later.   

[V.G Jason]

Quote from @Carol Burns:

Wow wow wow!!!  I have been thinking along these same lines for a few years now.  I couldn't for the life of me figure out how to make the cash flow work all the time, long term.  Especially after needed renovations  (just carpet and flooring) that took a huge chunk out of several years of cash flow.   All repairs and maintenance are so expensive now, just a few of them can wipe your cash flow out for a year.   BUT am I glad I own my little rental properties?  YES!  I consider them a hedge against other investments, NOT as a cashflow cow.  As a matter of fact, I put most of my monthly cash flow into a bank account reserved just for those properties for upcoming expenses.  And another thing I couldn't figure out was that yes, I could borrow more money against the properties to make the repairs  or buy another property, but how does that really help when I now have less cash flow from the original properties?   I think trying to figure all of that out and predict cash flow is really kind of going down the rabbit hole.  It'll make you crazy sooner or later.   

 That's what happens when you read BP from their ODC hero era, when any fat ****ing retarded monkey could cash flow a property unfortunately. The reality is buying the house is a store of value against currency debasement and the attraction quality is the location. That's really where the yield will shine. They got the message mixed up, hence their failing syndication. 

[Corby Goade]

Louder for the people in the back!

I've been saying this for years, but you were much more eloquent here than I am. High cash flow markets are a great way to lose your shorts. Properties never perform the way you think they will and on the rare occasion you actually profit, it's pure luck, not skill. Turnovers, vacancy and maintenance will kill you in those markets and it's FAR from the "passive" income people tell you they are getting when they are trying to sell you their junk deal. 

B properties in growing, landlord friendly markets with low crime and reliable rent growth and appreciation is the only way to go. Sure- the first few years will be tight, but the reason the numbers aren't great right away is because there is competition for those properties. People WANT to live there. 

Think about it- if the property is cheap and it's been sitting for a while, maybe that's because on one wants to live in that area. 

Simple supply and demand, you don't need some crazy spreadsheet to see that.

[Tommy Ray]

Great post.  Lots of details.  35 years at this and 70% of the experience in buy and holds / property mgt.

Think contrarian investing--buying on the down cycles.  Same with the financing of the notes / portfolio when interest rates go back down and you wanna extract equity for a non-taxing event.

Monetize your detailed nature.  I LOVE THIS EXPECTATION MGT POST.  It is raw and it is real.  Dig it!  Never lose that.

You mentioned prop mgt assuring you taps are off and you ended up getting minority flooded.  They are licensed, they are your fiduciary I hope you made them fix what they caused.  In addition, I hope you added it to your own aids--"city turn on water at meter (often unlock it) and leave it in the off position so as not to flood home".  I always make tenant do it as a hand off a property and recommend they do it on move in day while they are there to react if something goes wrong, having a water key nearby.  Prepositioning water keys in the same location through the rentals is key.  Training tenants upon move-in is huge.  Water, electrical shutoffs, and how to reset outlets if they trip.

Use cross collateralization of stocks for your down if possible.  Use a home in a house hack manner if possible for cash flow.  Use the wholesale method of buying in a down market to amplify results.   Strategic patience and guided development for maximum results...  

[Francesco Ponticelli]

Quote from @David Lutz:

Let me start by saying I am all in on RE. I have an MBA, spent years learning about RE before I pulled the trigger. And when I did, I bought 5 houses worth over $1M in 18 months with only $100K of my own money. So I feel pretty good about saying I am financially literate, know how to model, and to find deals purchasing out of state.

I’m also embarrassed to admit I was so focused on getting going that I just assumed I could track if I was doing well by watching my bank balance. That was dumb. To be fair, in addition to buying all those houses over the last 3 years I also dealt with an eviction, $47.4K in capital expenses, insurance claims, building teams in my local markets, and all the other nonsense involved in this lovely industry.

Anyway, I finally got around to putting together a complete general ledger and had the horrible realization that over the last two years (bank and credit card record limitation make it harder to go back farther)…

….. between 2022 and 2023 I have been $17.5K cash flow negative on $171K expected rent !!!!!

How the **** did that happen? I budgeted 21.2% of the expected rent toward vacancy, maintenance, and CapX, and in reality I ran at around 27% in the last two years. Also,.. why am I telling you? I figure that I’ve gotten so much from everyone at Bigger Pockets, and there is so little information on the hard numbers of how non-professional investors do, that I should give something back. Because most of the tools you have access to are a figment of imagination pushed by self-aggrandizing gurus and the Real Estate industry … because they only make money when you’re buying.

Again, let me stress I've made a lot of money over the last 3 years. I think you should buy real estate, I just want you to be smart. One of the major dangers is caused by the bizarre reality distortion field people have regarding the term cashflow. It seems like a lot of people use the term cashflow to refer to how much net income they average per month with no (or minimal) reserving or debt servicing. And the per door numbers sound huge, which is great but also meaningless. Because, reality check, if you think you're clearing $500 per month over 3 years ($18K) but you end up with one $5K Cap Ex cost, $4K in vacancy, and $3K in random maintenance then you're really only averaging $166 per month ($6K). And if you borrowed money for your downpayment from a HELOC, personal loan, cash out refi, 401K etc., then your hidden debt servicing can take your cashflow negative in a heartbeat. Rosy assumptions about how much free cash your real estate investment is going to throw off make it really easy to be unrealistic about what it's going to take to make owning rentals actually work.

So, 3 years into my Real Estate journey (5 with planning) I have some learnings I want to share:

• The default assumptions in every calculator you look at are rosy at best and complete lies at worst. Unless you buy a brand new house there is probably deferred maintenance. Your costs are going to be higher than you expect in the first few years. Plus, you’re not a professional. There is a high likelihood that you’re going to end up paying slightly more than you should for repairs, and turning houses when tenants leave is going to take longer than it should.
  • -- I’m sorry. I know you think you’re awesome. You’re not. Bleeding money that a pro wouldn’t is just going to happen. It’s better to anticipate it.
  • -- My recommendation is 25% of rent to cover vacancy, maintenance, and Cap X for older homes (+20 year), 20% for middle age (5 to 20), and 15% for new homes (you’ll need it eventually). I’m running hotter than that, but I honestly believe that I’ve caught up on deferred maintenance and these numbers are good for the long run.

• Have a plan for dealing with getting it wrong. I started with a $20K reserve. In addition to a strong W2, I have a HELOC to lean on. I stopped fed tax withholdings because the penalty is cheaper than borrowing cash, which buys a year (I still pay my taxes in full). In a pinch I can borrow against my 401K. And if things ever went truly sideways I could sell a house.

• Leverage is awesome. I borrowed 90% of the money for the homes I purchased at an average of ~4% interest. But the higher your leverage, the more likely you’re going to be cashflow negative. You’re going to make more money with more leverage, but only if you can handle the debt service. Don’t overextend yourself.

• As insane as it sounds, going all in actually helped. The rent from 4 houses covered the mortgage for 5 over the last 18 months I’ve been dealing with an appealed eviction and the court collecting and holding the rent.

• Everything I bought rented for 1% to 0.65% of the initial purchase price (more now). And the 1% has been the biggest headache. So if you go for cashflow you better be on premises, because there are going to be issue to deal with. And if you go for appreciation/quality houses you need to have a plan for dealing with weak cashflow.

• For pity sake don’t turn on water service on a Friday. My buddy and I have both ended up with minorly flooded houses despite the property managers telling us that all the taps had been turned off.

• If you’re buying out of state, ask potential property managers if they have local staff on site or if they outsource their inspections to a vendor (common for larger PM companies).

• When I model returns, I assume appreciation on B-/C+ properties at 1% above inflation. I did a lot of research, long term that’s a safe assumption. Rent I assume tracks with inflation (which is still great because a lot of your costs are fixed). This is probably a bit conservative, but I think it’s generally accurate, and I only like good surprises.

• You have to be able to get +$1000 per door to use a property manager, less than that and the minimums they charge start screwing up your returns.

• Water heaters, etc. cost roughly the same everywhere - it’s closer to a fixed cost. Buy where taxes are low on rental properties, populations are growing, economies are growing, and there are at least two of the following: Gov spend, Major healthcare, transportation hubs, universities, sports teams, industry concentration, tourism, manufacturing. These drive jobs, the more there are where you buy the better and more stable your investment.
  • -- If you’re as nuts as I am read the local area development plans and research planned corporate and other investments. Building an amazon hub and a zoo to the east of the city along with a new planned transit rail line? Awesome.

• Offer what you have and ask for help (preferably in that order). I did some financial modeling for an RE Agent I wanted to build a relationship with, and a year later he gave me some great recommendations on local tradespeople. During a friendly conversation I asked one of my property managers for recommendations on areas with the most growth potential and ended up buying two homes there.

• LLC get expensive if you're thinking of opening one for every property, plus it's a lot of work to make sure they can't be pierced. Consider just getting an umbrella insurance policy.

• Interest only HELOC are only just interest until you hit the repayment period, so make sure you're ready for the increase when you start paying back principal. Also, some lenders have limits on how many mortgages you can have and qualify for a HELOC. So if you think you might want one, set it up early.

• Current taxes on the property you buy generally lag current market value, and in some cases taxes on rental properties are higher than owner occupied. That’s all going to get corrected when your purchase triggers a reappraisal. So put together some realistic tax estimates before you buy.
  • -- All the info you need is available online from the local assessor, and pay attention to what the local community has tacked on to the mill rate. Taxes for two houses twenty minutes apart can be wildly different.

Major costs over last 3 years on 5 homes:

• $10K in missed rent leading to and waiting for eviction
• $3K Eviction costs (lawyers, travel, writ, etc.)
• $2.5K additional lost rent due to 4 month instead of 2 month property turn
• $3.8K for a new furnace
• $7.4K for a new HVAC
• $700 for a bathroom re-pipe
• $12K turn on large home, included new high quality carpet and full repaint
• $5.5K in unnecessary plumbing issues caused by tenant in eviction (no way to recover costs)
• $1.5K in utility bills during vacancy or owner responsibilities
• $900 for a refrigerator
• $4.8K for concrete piers to shore up a foundation
• $5.6K for a roof (insurance claim)
• $5.2K for another roof
• $1.3K for new AC line set (punctured in second roof replacement)
• $1.6 for a water heater
• $1.3 for a water heater
• $2K for a water heater
• $1.7K for new water line from meter to house
• … this actually isn’t everything but I’m getting depressed.

That’s $70.8K which was money that never made it to me, I didn’t expect to spend, or thought I had more time. And this is separate from regular maintenance my property management companies took care of and deducted from the rental income.

So the moral here is that RE is great but you can’t depend on cashflow. If you buy class C or D properties you are going to have way more issues than you can ever anticipate on paper. And if you buy class A or B you’re banking on appreciation. Either way, buy and hold is a long term play and it’s not going to throw off lots of cash in the short term. I’m guessing my year 4 is going to be pretty good, but it’s taken that long to get everything stabilized.

And If I decide to pull equity out to buy more houses, it extends this issue. I would end up with cash to buy more houses, but my monthly debt load goes up and cashflow goes down. So dream of equity and forget about cashflow,... its just a myth.

* These are just my personal beliefs based on my experience. If you hadn’t guessed I am not a RE professional (you probably aren’t either), and that’s kind of my point. I think it’s way too easy to over estimate investment performance based on how well the pro’s do. So don’t take any of my opinions as anything more than that. Make sure you do your own due diligence on your own deals.

**and if you find this info useful vote the post up. I'd like for folks to be able to find this kind of detailed info more easily.

 Great post, giving transparency of what really RE investing is. 

[Marcus Auerbach]

Quote from @David Lutz:

@Becca F.

What are peoples’ thoughts on where rent’s should be set or the best way to get them up if you fall behind?

You are spot on: not considering annual increases for every property is a cardinal mistake. Tenants expect them and it is better to increase a small amount every year then a larger amount after several years.

We typically know what market rent is from the turnovers and keeping a long-term tenant slightly below market seems to be the sweet spot. We also keep an eye on hourly wage growth, at the moment 5.1% in Wisconsin (yes, over inflation). You have to raise rents, because your expenses go up with inflation (have you paid for a roof lately?) but you also want to create an incentive for people to stay.

From a tenant's perspective, there is also a monetary cost to moving, not to mention the effort it takes all the way down to the little annoying things like  changing the zip codes on your credit cards or address on your drivers license.

Great original post by the way, every new investor should read it. I invest in Milwaukee and our housing stock is 60-120 years old. We stick to the 1960's inventory, which is easier to work on, but I totally agree cash flow as in "replace my W2" is a myth, it is necessary and also better to re-invest cash into asset upgrades. 

The real money is made in the equity column.

[Becca F.]

Quote from @Marcus Auerbach:

Quote from @David Lutz:

@Becca F.

What are peoples’ thoughts on where rent’s should be set or the best way to get them up if you fall behind?

You are spot on: not considering annual increases for every property is a cardinal mistake. Tenants expect them and it is better to increase a small amount every year then a larger amount after several years.

We typically know what market rent is from the turnovers and keeping a long-term tenant slightly below market seems to be the sweet spot. We also keep an eye on hourly wage growth, 

. You have to raise rents, because your expenses go up with inflation (have you paid for a roof lately?) but you also want to create an incentive for people to stay.

From a tenant's perspective, there is also a monetary cost to moving, not to mention the effort it takes all the way down to the little annoying things like  changing the zip codes on your credit cards or address on your drivers license.

The real money is made in the equity column.

 Great points about keeping an eye on wage growth and it's a hassle for tenants to pack up and move. When I had my first rental property, I had at least 3 people tell me they don't raise rents on good tenants. And one of them in the Bay Area had been renting it out since early 2000s - when I talked to her it was 2018, never raised rent since tenant was a nice guy, not a high income earner. The reasoning being she bought this back in the 1990s, mortgage paid off. They didn't even raise it the 1.2% to 3.6% (varies by year) allowed by rent control. I would think there's now a lot of deferred maintenance and property needs a new roof, etc if tenant has been living there for 20+ years.

SFHs generally aren't under rent control, the year the tenant started renting it matters, depends on the city. For San Francisco if tenant started renting it in 1996 or after, no rent control on SFH, but you do have to give the tenant 90 day notice if raising it more than 10%. If an old tenant moves out and new one moves in you can charge market rate rent currently (on SFH and MF, but there's an Assembly bill in the works to stop this)

I don't know if they've checked and seen what California rents are now. I think sometimes DIY landlords would be better served with having a property manager. My friends that are doing this aren't what I could consider investors in the sense they're not monitoring the market - they have a good tenant that doesn't bother them so keep the rent the same for years until something bad happens like the bathtub overflows. Or tenant gets mad and complains to the Rent Board "hey my landlord has an illegal ADU, fire code violations, mold etc."

They have the equity growth from buying in 1990s or buying a great deal in 2008 but they could be doing much better to maximize return. 

[Stetson Oates]

This is a great discussion. I think strategies change as time goes on and markets change. Right now I'm guessing the best strategy is to eliminate debt thats 5% interest or more. My personal strategy is to use debt responsibly and scale. 50% LTV or less is what I like to do.

[Marcus Auerbach]

@Becca F. thanks for breaking down CA rent issues! I knew it was bad, but it is interesting to see some details. 

We don't have rent control, there are no restrictions when you renew a lease. Notices are 30 days, however, I like the idea of giving tenants the courtesy of a heads-up if you are increasing rents more than 10%. But IMO, if you have to jump up double digits without a material change to the unit, you've screwed it up in the years prior.

Staying on top of fair market rents is not easy for small landlords. They don't have enough data points. I see it from our own turnover, we usually have 2 or 3 every month during the summer and I see it from my work as an agent. Rentometer is not a very reliable source, especially for nicer and updated units. Maybe this is particular to Milwaukee?

 We often see it when a duplex hits the market with 15-year-old rents, buyers really struggle to run numbers with confidence. And that makes it hard to make a competitive offer. Milwaukee has 66.000 duplexes, but only very few are for sale and when they do you always see increasing disengagement from the owner in the years leading up to the sale, including leases on cruise control and low rents from way back when.

I think a lot of small investors are unsure about how to actually do rent increases and on top of that it is an inconvenient conversation they would like to avoid.

When you look at the difference in ROI that annual rent increases make over ten years even for a small portfolio, it is the biggest management mistake. This is how you take your cash flow from $200/door to $600.

A $400 increase on 10 units x 12 months that is a $48,000 difference per year in net income.

[Joe Scaparra]

@David Lutz, great post!  Some I agree with, some not, but putting your thoughts out there for people to take shots at is noteworthy.  

For me it is ALL ABOUT CASH FLOW!  For me Appreciation is icing on the cake and an after thought as I have NEVER concerned my self about APPRECIATION.  Why?  As a BUY and HOLD investor seeking out cash flow, I have been investing in small multi-family properties that cash flow POSITI◊E from day ONE!  I have yet to sell a property and I bought my first investment property in 2003.  I have come to realize that even though I have not sold, appreciation has really aided me in that it has help fuel my rent increases.....so for that yes appreciation is important even to a Buy and Hold investor.

Yes cash flow positive means net income AFTER vacancy, maintenance, insurance, property tax and interest on the mortgage!!! What about CAPEX....Meh. My biggest CAPEX cost is either a roof or AC replacement. My roofs get replaced with an insurance claim (lots of hail storms in Texas) and I expect AC/Heaters to last 12-15 years so that is usually easily covered in one year of positive cash flow for a unit when I am still paying a loan and covered in 4 months or less of positive cash flow once the property is paid off.

My small multi-family (duplexes) are usually built in the 80s......not NEW! I also self-manage. You are so right that property management will suck you dry!  My vacancy rate is soooooooooo low!  Expecting a unit to go vacancy for a month between renters is ridiculous.  Over the last 20 years, I would guess my vacancy rate averaged NO MORE THAN 2 weeks.  Why is that?  Because PROPERTY TYPE MATTERS!  Small multi-family is in more demand.....why.....because there are more people needing and can afford SMALL MULTI-FAMILY and PEOPLE hate to live in apartment buildings.  

Also, you said you bought $1 million in property with only 100k as if that is a good thing??????  Is that a good thing????  I have been putting down 20-25% down even before 2008 when it was  not even required......why.......because I was seeking POSITIVE CASH FLOW.  

Lastly, where you invest is important. INVEST in a state that is LANDLORD friendly, like TEXAS.  Evictions normally take 4 week once the demand letter is given.  If I used your expense numbers, I don't think I would ever invest.  Cheers.

[Stephen Dispensa]

Alot of what you say here are things my own clients have experienced. (In addition to being an investor focused broker I also provide property management for my clients in long-term holds). The clients that have done the best by far are those who take on value-add projects. They see the most appreciation, and have the lowest capital expenditure costs post-renovation. We get the best tenants in those buildings, and their cash flow is highest.

The idea that someone is going to just sell you a positive cash-flowing asset at market rate is ludicrous. You have to put in the work to ensure your asset is generating maximum revenue, and costing you the least amount in repair costs. A water heater is cheaper to replace than a flooded floor. A roof is cheaper to replace than all the drywall in a unit. An electrical rewire is cheaper than rebuilding a burnt out building. It's call real estate INvesting not real estate OUTvesting. You need to put money into these properties to build the porfolio you want.

[Joe Scaparra]

@David Lutz

Lets look at your major cost vs what I would expect here in TEXAS

Major costs over last 3 years on 5 homes:

• $10K in missed rent leading to and waiting for eviction
• $3K Eviction costs (lawyers, travel, writ, etc.)
• Evictions outside the Pandemic takes 4 weeks in Texas.  Cost to file $150, no need for a lawyer, follow the rules.....easy peasy!  Best way to prevent: select better tenants...yes that is not always the case but it helps.
• $2.5K additional lost rent due to 4 month instead of 2 month property turn
• Loss rent on Small Multi-Family properties minimal unless you had to evict.  Evictions usually take an extra two weeks to fix up due to property condition.  In 21 years of managing my 20 properties, I probably have had 4 evictions.
• $3.8K for a new furnace
• $7.4K for a new HVAC
• In Texas HVAC is used, furnace not so much.  Systems cost have risen from 3.5k to 6.5k but last 12-15years.  In Texas HVAC/Heaters are one system 
• $700 for a bathroom re-pipe
• I began recently upgrading my 1980s bathrooms with New Tub, New Bath/Shower faucets, and NICE, NEW tile from tub to ceiling......Cost labor and materials, $1700 per bathroom.
• $12K turn on large home, included new high quality carpet and full repaint
• Here lies the major deviation: Property type matters.....I have NO LARGE HOMES, I install NO CARPET.  MY paint cost is $1-$1.5 per sq foot.  My units rarely go over a 1000sq ft. Hence my cost to repaint $1000-1500 per unit.  Luxury Vynl flooring is my FRIEND!!!!
• $5.5K in unnecessary plumbing issues caused by tenant in eviction (no way to recover costs)
• Hire a handyman when possible, they are cheaper.  Small units have lower cost to repair.
• $1.5K in utility bills during vacancy or owner responsibilities
• My vacancy rate in the Austin area has been less than a week on average, usually a day.  I begin advertising when given 30 day notice that the current tenant is leaving.  Property type matters.
• $900 for a refrigerator
• I replace appliances with used appliances......hence a fridge cost no more than $250
• $4.8K for concrete piers to shore up a foundation
• I haven't bought a property needing foundation repair yet! Yes some settling but nothing serious.....maybe because I buy 1980 year old homes the foundation would show signs of failing before I buy.
• $5.6K for a roof (insurance claim)
• $5.2K for another roof
• Yes my insurance deductibles are 1% of insured value so about 3-4k.
• $1.3K for new AC line set (punctured in second roof replacement)
• Roofers would have paid that
• $1.6 for a water heater
• $1.3 for a water heater
• $2K for a water heater
• My water heaters cost $400-$500 from home depot and $200 labor to install, again I use handyman vs plumber cost less.
• $1.7K for new water line from meter to house
• Haven't had to do a water line.  New construction?  Sewage lines in Texas used cast iron pipes before 1970s and they are rusting out.....hence I don't buy older than 1980 homes.  Property type, location, and age of property matters.
• … this actually isn’t everything but I’m getting depressed.
• Because I MANGE my own properties, let me give you a couple maintenance tips.....Don't hire a CONTRACTOR!  They will double your cost.  Do hire workers directly....find them at  home depot or MacDonalds at lunch time (painters easy to spot).  Driving through your rental property, if you see a remodel going on stop and talk to the workers, head cheese or contractor is probably not there.    Best tip: Go to "B or C" apartment complex, locate the maintenance man, he is jack of all trades, master of none but can do almost anything you need done.....he gets paid at best $15-20 an hour.  Most small jobs he can do in an hour and you give him $50-$100 and you have a friend for LIFE!!!!!

Lastly, don't work harder.........work smarter!!!!!!  Cheers!

[Amby Bhagtani]

Quote from @David Lutz:

Let me start by saying I am all in on RE. I have an MBA, spent years learning about RE before I pulled the trigger. And when I did, I bought 5 houses worth over $1M in 18 months with only $100K of my own money. So I feel pretty good about saying I am financially literate, know how to model, and to find deals purchasing out of state.

I’m also embarrassed to admit I was so focused on getting going that I just assumed I could track if I was doing well by watching my bank balance. That was dumb. To be fair, in addition to buying all those houses over the last 3 years I also dealt with an eviction, $47.4K in capital expenses, insurance claims, building teams in my local markets, and all the other nonsense involved in this lovely industry.

Anyway, I finally got around to putting together a complete general ledger and had the horrible realization that over the last two years (bank and credit card record limitation make it harder to go back farther)…

….. between 2022 and 2023 I have been $17.5K cash flow negative on $171K expected rent !!!!!

How the **** did that happen? I budgeted 21.2% of the expected rent toward vacancy, maintenance, and CapX, and in reality I ran at around 27% in the last two years. Also,.. why am I telling you? I figure that I’ve gotten so much from everyone at Bigger Pockets, and there is so little information on the hard numbers of how non-professional investors do, that I should give something back. Because most of the tools you have access to are a figment of imagination pushed by self-aggrandizing gurus and the Real Estate industry … because they only make money when you’re buying.

Again, let me stress I've made a lot of money over the last 3 years. I think you should buy real estate, I just want you to be smart. One of the major dangers is caused by the bizarre reality distortion field people have regarding the term cashflow. It seems like a lot of people use the term cashflow to refer to how much net income they average per month with no (or minimal) reserving or debt servicing. And the per door numbers sound huge, which is great but also meaningless. Because, reality check, if you think you're clearing $500 per month over 3 years ($18K) but you end up with one $5K Cap Ex cost, $4K in vacancy, and $3K in random maintenance then you're really only averaging $166 per month ($6K). And if you borrowed money for your downpayment from a HELOC, personal loan, cash out refi, 401K etc., then your hidden debt servicing can take your cashflow negative in a heartbeat. Rosy assumptions about how much free cash your real estate investment is going to throw off make it really easy to be unrealistic about what it's going to take to make owning rentals actually work.

So, 3 years into my Real Estate journey (5 with planning) I have some learnings I want to share:

• The default assumptions in every calculator you look at are rosy at best and complete lies at worst. Unless you buy a brand new house there is probably deferred maintenance. Your costs are going to be higher than you expect in the first few years. Plus, you’re not a professional. There is a high likelihood that you’re going to end up paying slightly more than you should for repairs, and turning houses when tenants leave is going to take longer than it should.
  • -- I’m sorry. I know you think you’re awesome. You’re not. Bleeding money that a pro wouldn’t is just going to happen. It’s better to anticipate it.
  • -- My recommendation is 25% of rent to cover vacancy, maintenance, and Cap X for older homes (+20 year), 20% for middle age (5 to 20), and 15% for new homes (you’ll need it eventually). I’m running hotter than that, but I honestly believe that I’ve caught up on deferred maintenance and these numbers are good for the long run.

• Have a plan for dealing with getting it wrong. I started with a $20K reserve. In addition to a strong W2, I have a HELOC to lean on. I stopped fed tax withholdings because the penalty is cheaper than borrowing cash, which buys a year (I still pay my taxes in full). In a pinch I can borrow against my 401K. And if things ever went truly sideways I could sell a house.

• Leverage is awesome. I borrowed 90% of the money for the homes I purchased at an average of ~4% interest. But the higher your leverage, the more likely you’re going to be cashflow negative. You’re going to make more money with more leverage, but only if you can handle the debt service. Don’t overextend yourself.

• As insane as it sounds, going all in actually helped. The rent from 4 houses covered the mortgage for 5 over the last 18 months I’ve been dealing with an appealed eviction and the court collecting and holding the rent.

• Everything I bought rented for 1% to 0.65% of the initial purchase price (more now). And the 1% has been the biggest headache. So if you go for cashflow you better be on premises, because there are going to be issue to deal with. And if you go for appreciation/quality houses you need to have a plan for dealing with weak cashflow.

• For pity sake don’t turn on water service on a Friday. My buddy and I have both ended up with minorly flooded houses despite the property managers telling us that all the taps had been turned off.

• If you’re buying out of state, ask potential property managers if they have local staff on site or if they outsource their inspections to a vendor (common for larger PM companies).

• When I model returns, I assume appreciation on B-/C+ properties at 1% above inflation. I did a lot of research, long term that’s a safe assumption. Rent I assume tracks with inflation (which is still great because a lot of your costs are fixed). This is probably a bit conservative, but I think it’s generally accurate, and I only like good surprises.

• You have to be able to get +$1000 per door to use a property manager, less than that and the minimums they charge start screwing up your returns.

• Water heaters, etc. cost roughly the same everywhere - it’s closer to a fixed cost. Buy where taxes are low on rental properties, populations are growing, economies are growing, and there are at least two of the following: Gov spend, Major healthcare, transportation hubs, universities, sports teams, industry concentration, tourism, manufacturing. These drive jobs, the more there are where you buy the better and more stable your investment.
  • -- If you’re as nuts as I am read the local area development plans and research planned corporate and other investments. Building an amazon hub and a zoo to the east of the city along with a new planned transit rail line? Awesome.

• Offer what you have and ask for help (preferably in that order). I did some financial modeling for an RE Agent I wanted to build a relationship with, and a year later he gave me some great recommendations on local tradespeople. During a friendly conversation I asked one of my property managers for recommendations on areas with the most growth potential and ended up buying two homes there.

• LLC get expensive if you're thinking of opening one for every property, plus it's a lot of work to make sure they can't be pierced. Consider just getting an umbrella insurance policy.

• Interest only HELOC are only just interest until you hit the repayment period, so make sure you're ready for the increase when you start paying back principal. Also, some lenders have limits on how many mortgages you can have and qualify for a HELOC. So if you think you might want one, set it up early.

• Current taxes on the property you buy generally lag current market value, and in some cases taxes on rental properties are higher than owner occupied. That’s all going to get corrected when your purchase triggers a reappraisal. So put together some realistic tax estimates before you buy.
  • -- All the info you need is available online from the local assessor, and pay attention to what the local community has tacked on to the mill rate. Taxes for two houses twenty minutes apart can be wildly different.

Major costs over last 3 years on 5 homes:

• $10K in missed rent leading to and waiting for eviction
• $3K Eviction costs (lawyers, travel, writ, etc.)
• $2.5K additional lost rent due to 4 month instead of 2 month property turn
• $3.8K for a new furnace
• $7.4K for a new HVAC
• $700 for a bathroom re-pipe
• $12K turn on large home, included new high quality carpet and full repaint
• $5.5K in unnecessary plumbing issues caused by tenant in eviction (no way to recover costs)
• $1.5K in utility bills during vacancy or owner responsibilities
• $900 for a refrigerator
• $4.8K for concrete piers to shore up a foundation
• $5.6K for a roof (insurance claim)
• $5.2K for another roof
• $1.3K for new AC line set (punctured in second roof replacement)
• $1.6 for a water heater
• $1.3 for a water heater
• $2K for a water heater
• $1.7K for new water line from meter to house
• … this actually isn’t everything but I’m getting depressed.

That’s $70.8K which was money that never made it to me, I didn’t expect to spend, or thought I had more time. And this is separate from regular maintenance my property management companies took care of and deducted from the rental income.

So the moral here is that RE is great but you can’t depend on cashflow. If you buy class C or D properties you are going to have way more issues than you can ever anticipate on paper. And if you buy class A or B you’re banking on appreciation. Either way, buy and hold is a long term play and it’s not going to throw off lots of cash in the short term. I’m guessing my year 4 is going to be pretty good, but it’s taken that long to get everything stabilized.

And If I decide to pull equity out to buy more houses, it extends this issue. I would end up with cash to buy more houses, but my monthly debt load goes up and cashflow goes down. So dream of equity and forget about cashflow,... its just a myth.

* These are just my personal beliefs based on my experience. If you hadn’t guessed I am not a RE professional (you probably aren’t either), and that’s kind of my point. I think it’s way too easy to over estimate investment performance based on how well the pro’s do. So don’t take any of my opinions as anything more than that. Make sure you do your own due diligence on your own deals.

**and if you find this info useful vote the post up. I'd like for folks to be able to find this kind of detailed info more easily.

One of the best posts on BP. The only thing I would say it if you are investor on a W2 with limited time for BRRRR etc, you will have to wait 5 years before a cashflow. After 5 years things start looking a lot better. In 10 years you won't regret any of this but starting is super hard. 

[Henry Lazerow]

You definitely do NOT have to wait 5 years to cashflow. All over north side of chicago (class B to A) you can get 4 units for $800k-1 mil range that market rate rent $7-9000 a month. You put 25 down and have solid cashflow even in first few years. 

I also just put two 4 units in a B suburb contingent at $775k combined that is rented $8000 a month. Lots of these type of deals out there. Client is actually on BiggerPockets also.

Where it’s harder is if trying to buy low priced properties or single family houses. Tons of competition for these and margins after cap/ex can be little to nothing. It costs the same for a roof on an $800k place as a $200k place. It changes your expense ratios for the worse the cheaper you go. 

[Shawn Bhatti]

Wow, great post @David Lutz !

Cashflow really is a myth early on and unfortunately most investors do not realize this. I have dealt with many of the same challenges that you have, and that is why it is so important to have sufficient reserves and be extremely conservative (especially in today's environment) when estimating/projecting future cashflow.

I would say this is especially true when buying turnkey properties from a investment service that provides these. They tend to underperform and dazzle you with these sexy projections that rarely turn out to materialize as expected!

[Dan H.]

Quote from @Marcus Auerbach:

@Becca F. thanks for breaking down CA rent issues! I knew it was bad, but it is interesting to see some details. 

We don't have rent control, there are no restrictions when you renew a lease. Notices are 30 days, however, I like the idea of giving tenants the courtesy of a heads-up if you are increasing rents more than 10%. But IMO, if you have to jump up double digits without a material change to the unit, you've screwed it up in the years prior.

Staying on top of fair market rents is not easy for small landlords. They don't have enough data points. I see it from our own turnover, we usually have 2 or 3 every month during the summer and I see it from my work as an agent. Rentometer is not a very reliable source, especially for nicer and updated units. Maybe this is particular to Milwaukee?

 We often see it when a duplex hits the market with 15-year-old rents, buyers really struggle to run numbers with confidence. And that makes it hard to make a competitive offer. Milwaukee has 66.000 duplexes, but only very few are for sale and when they do you always see increasing disengagement from the owner in the years leading up to the sale, including leases on cruise control and low rents from way back when.

I think a lot of small investors are unsure about how to actually do rent increases and on top of that it is an inconvenient conversation they would like to avoid.

When you look at the difference in ROI that annual rent increases make over ten years even for a small portfolio, it is the biggest management mistake. This is how you take your cash flow from $200/door to $600.

A $400 increase on 10 units x 12 months that is a $48,000 difference per year in net income.

>I like the idea of giving tenants the courtesy of a heads-up if you are increasing rents more than 10%. But IMO, if you have to jump up double digits without a material change to the unit, you've screwed it up in the years prior.

your response is market specific as average rent increase in my market for many of the recent years has been at least 10%.  It is why the cash flow improves so fast in my market.  10 of my units have had at least 10% rent increase in the last year.   My highest rent increase in the past year in terms of percentage was over 13%.   Two years ago my highest rent increase was even a higher percentage.  Also note I have my good tenant’s rent slightly below market.   Even with these rent increases, the rent are slightly below market rent.  

It is critical to realize different markets have different traits.   This goes beyond initial cash flow versus appreciation.   

Best wishes

[Jonathan Klemm]

This is a great post @David Lutz you should - most definitely turn it into a blog.

@Account Closed great read!

[Hanh Hoang]

Great post I do believe a lot of people under estimate the COST of holding real estate. 

I recently bought a 6 unit in Barstow and I knew it was a value add play where i had to spend some money to remodel the units to get the building filled.

With lost rents and capital improvements i have spent about $50,000 in 8 months of ownership to stabilize the 6 unit property.  It currently cash flows about 1500$ per month. For this specific property.

The 50K in funds came from my other 3 investments homes that currently cash flow. 

I did spend the 50K in money but it came from the 3 investments I had bought in the last 6 years. 

[Eric Rosiello]

Near the Boston area a good rule of thumb is monthly rent = 1% of purchase price and mortgage payment (principal, interest, and taxes) at 50% or less of rent. This is for 2-4 unit multifamily, 20 to 25% down. Assume tenants pay all utilities except common electric and water and landscaping is minimal. Should be able to cash flow pretty well under these conditions and, as others have mentioned, you'll make most of your money in equity gains via debt pay down and appreciation.