Are You Getting Great Cash Flow from your Rental Properties?

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So what do you consider a good cash flow deal?  I was once taught that a good cash flow deal is when rents are 1% of purchase.  So if a property rents for $1000, purchase must not exceed 100K.  Does that kind of cash flow excite you?

 Let’s take a closer look. 

  5% Lender  Cash Purchase
Purchase  $                         100,000  $                         100,000
Down Payment  $                            25,000  $                         100,000
PITI  $                               (552)  $                               (150)
Rents  $                              1,000  $                              1,000
Expenses 30%  $                                  300  $                                  300
Net Cash Flow  $ 148  $ 550
Cash on Cash Return 7% 7%

 

 In this scenario assuming $150 for Tax & Insurance and 30% expenses, there is not much left over.  Does a 7% return excite you?

 I believe a good cash flow deal is when rents are 1.5 – 3% of purchase.  How about a deal with $3000 in rents for 100K?  Rents are 3% of purchase.  Is that possible, because that is some extraordinary cash flow?  My friends, it is possible.  Those are numbers from a deal we are working on right now, it is in a decent area and that isn’t even the best cash flow deal we have found.  Today’s market has resulted in amazing opportunities and there are some markets that have really high returns.  Let’s look at the numbers a little closer.

  5% Lender Cash Purchase
Purchase  $                         100,000  $                         100,000
Down Payment  $                            25,000  $                         100,000
PITI  $                               (552)  $                               (150)
Rents  $                              3,000  $                              3,000
Expenses 30%  $                                  900  $                                  900
Net Cash Flow  $                 1,548  $                 1,950
Cash on Cash Return 74% 23%

 

Wow, look at that CASH FLOW!!  Monthly Net Cash Flow is over $1500 per month and almost 2K if purchased with cash.  A double digit cash on cash return is considered good, 74% is astronomical.  It takes some digging to find these diamonds in the rough, but a few deals like that and you can start planning an early retirement.  It will probably not surprise you to hear that my market is #2 for highest returns based on a recent article in Business Week.  So, what kind of cash flow and returns are you getting in the markets you invest in?

About Author

Ryan is the founder of Real Return Real Estate™ , a company focused on buying property at extreme discounts, selling and renting with cash flow.

10 Comments

  1. Wow!! Now those are great cash flow numbers. I know Canada’s market is different so it’s tough to really compare but if I find a 1% deal in a good area I do a flip or a little happy dance!! Most of the deals we do are actually about .75% or .80%. They still generate decent positive cash flow thanks to great financing terms and a larger down payment which we typically get from a joint venture partner.

    We can find 1% or better deals but usually they are properties we won’t want to hold because of their locations. Not saying other investors can’t make deals like that work – but we’ve found that they are the type of deals we don’t want to put our time and effort into. They require too much hand holding the make that cash flow sustainable.

    Besides – I haven’t even seen a condo for sale for $100,000 in years and years let alone a house! I’m sure we still have some under $100,000 homes in Canada but not on the West Coast where I live and invest.

    Cool post! Thanks for sharing.

  2. Thanks Julie,

    I did a ton of research to find markets that I feel can offer great returns and we can mitigate risk. There are still challenges in every market, I’ve heard great stories and horrible stories about every market. The numbers may look great on deals, but the reality may not if it is not in a solid area. It comes down to a numbers game, we sift thru a lot of deals to find worthy prospects then write a lot of offers. Of course many we don’t get as others will pay more than we are willing to pay but we stick to our criteria. There are tons of great opportunities for savvy investors. Thanks for sharing and best of luck!!

  3. I love that you’ve insisted upon minimum quality of location. Over the years, I’ve been forced to come up with a relatively fail safe formula to ascertain relative location quality.

    Would you put my 79 year old mother into this property to live by herself? When I ask that question to people bringing me deals, the most common response is crickets. 🙂 We will not put clients into anything I wouldn’t put Mom into — no exceptions, no debate.

  4. 45% is a more realistic estimate of expenses if you’re planning on holding for the long term. Otherwise deferred maintenance builds up, and you won’t be able to afford that new roof in 20 years. Just trying to reduce surprises for new investors.

  5. If someone can afford to pay $3000 for rent, why wouldn’t they buy their own house.
    That is very high rent in NJ…. Lucky to get 1500 and the cost of the condo would be 400’s

  6. Sorry but I don’t believe this was possible even within the past 10 years. MAYBE you had one deal like that but not many. I looked at your website and you’ve got sales prices of $100k and rents of $950–that is common, but not $3k.

  7. Hey Jordan, we have done deals with similar numbers, there is a lot to consider. First, these are not properties in A areas that are already rented and with no deferred maintenance. These types of deals take work to find. You have to buy distressed, rehab or redevelop the property, fill vacancy and place management. They are most often found in C areas, maybe B if you are lucky. As you can see, there are risks involved with distressed properties and C areas. Experienced investors that are experts in their area know how to find these properties and which pockets of neighborhoods and streets you can find these.

    For example, in a lot of the cheaper midwest markets you have C class blue collar neighborhoods that are solid rental areas. Nothing spectacular but they are not warzones which are to be avoided. A lot of times you can find a single family or duplex to fix up and rents are around 2% of your all in. On occasion you can find 3%. You have to be careful though, the better the numbers look on paper, the worse the area which means much more risk. That is why experience and expertise is needed to mitigate the risk and make the right investment decisions.

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