When it Comes to Your Rental Portfolio, How Much Cash Flow is Enough?

by | BiggerPockets.com

“Cash flow” is a term that comes up in most conversations on real estate investing—and for good reason. As a landlord, if the rent you charge is significantly higher than your expenses, that difference can not only help you build wealth but can also serve as a potential cash cushion, there to soften the blow when you have too many vacancies or when the unexpected happens and you need reserves.

And the unexpected will happen, eventually. It could be anything from an old roof needing to be replaced to termite damage or even a bridge being built over your property. (Ask me how I know.)

After 30 years of investing in real estate, I can assure you that I have no shortage of bizarre landlord stories.

In those tough situations, many real estate investors tap into whatever access to capital they have, whether it be reserves, lines of credit, or even their network of private lenders.

Even so, the conversation is mixed on how much cash flow is necessary to provide that “cushion” and how much is needed to help the investor grow his/her portfolio.

Related: The Secret the Rich Understand About Building Wealth (And No, It’s Not All About Cash Flow)

How Much Cash Flow is Enough?

Personally, I’ve always had the mindset that cash flow is king. When I began investing in real estate, I had a wife and two young children to support, and I was in search of more income.

Over the years, my sweet spot for minimum cash flow was about $300 to $400, but I must say that this goal hasn’t been attainable for every single property. Some properties have brought in less, while others have brought in much more.

For example, I have one property right now that cash flows $100 a month, and I hate it, but that’s just the way it shook out. I have quite a bit of equity in it, but the house isn’t worth much. The other extreme is that I have a property that cash flows $1,600 a month (never underestimate the power of improving a property for highest and best use).  

So, instead of focusing on single properties, I started to look at my real estate portfolio in its entirety, and I think this is a practice investors of all experience levels would benefit from.

What is the average cash flow? What is your average cost of capital for all your properties?

For some investors, though, increasing cash flow is less of a priority compared to some of their other investing goals.

Investing Goals & Tax Implications

Investors who are already high income earners may be looking for tax write-offs and losses to offset earned income. In other words, having more cash flow (income) may not serve you in certain phases of your life from a taxation perspective.

Maybe before you invest in your next property you should ask your accountant about how much cash flow you can add without significantly increasing your taxes.

Other investors may be more interested in long-term capital gains and appreciation. My point is that getting more cash flow isn’t the goal for all real estate investors.

buy-and-hold

Ways to Increase Cash Flow

But if you’re like me, always looking to increase cash flow, there are a few ways to do it.

Of course, pursuing highest and best use of the property by making improvements is a common way to increase rent. But if you’re investing in higher-end properties with less room for improvement, this can be tough. After all, the more the property is worth, the more cash flow you need.

Related: The Hidden Cash Flow Killer Most Rental Owners Don’t Consider

Another strategy is classic arbitrage: tapping into your equity in the property and investing that money somewhere else, making a higher return than your interest rate.

Certainly, cash flow helped build and sustain my real estate portfolio. Looking back, though, I believe combining my emphasis on cash flow with using arbitrage and tax-saving strategies such as taking passive losses allowed me to build wealth even faster.

So how important is cash flow to you, and how much is “enough”? Besides increasing cash flow, what other strategies are you using to build and preserve wealth?

Weigh in below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

13 Comments

  1. Larry Brown

    I have a couple of comments. First, it would be helpful for you to define “cash flow” as I get the impression that some investors define cash flow as money left over after mortgage, taxes, and insurance are subtracted from the rent. I personally define “cash flow” as what I have left over after all expenses including mortgage expense, taxes, insurance, repairs, utilities I am responsible for, a reserve for capital expenses, property management, an assumed vacancy rate, etc. Failure to take all expenses into account is a recipe for failure. My second comment relates to income taxes – You indicated some investors don’t want cash flow, that they want real estate so they can take losses and reduce their tax burden. Personally, I would love to pay twice as much in income taxes (assuming the income tax rate stays the same) as that means I have a lot more taxable income (and ultimately spendable/usable income) than I currently have. (Note – I understand that depreciation helps to shield some of the rental property “cash flow” from taxes but I would still love to show a taxable profit on each and every investment).

  2. Edward Synicky

    Larry, I think you are right on in your definition of cash flow, if you have $200 a month in cash flow and you are not using that money to fund your reserves for other expenses you will soon learn the folly of that strategy.
    Cash flow will not make you rich at first, appreciation is what does that wonder. But without cash flow to sustain your investment there will be no time for appreciation. And you are correct with your tax comment, I tell my young friends just starting out I want them to pay a million dollars a year in taxes, just imagine the income it would take to accomplish that goal. Given all of that I certainly like depreciation saving me $500 a year in tax free rent.
    At my stage of life today after 45 years of investing, I really have little interest in appreciation (my heirs still do). I want as much cash flow as possible as my days of deferred gratification are over. Today I want to spend money and have life experiences with my children and grandchildren I could not afford to pay for when I was starting out. My cash return on cash is dismal, but I don’t care, the more equity the more monthly cash the lower the return. Cash is King. Good investing to all.

  3. David Roberts

    Dave, you’ve been putting out Dionne fantastic blogs lately.

    Sometimes other blogs don’t hit points but lately yours have.

    What a great question about cash flow. I feel like a lot of this has to do with market timing. For example, those that bought in 2009-2012 in the Midwest have been able to cash out a lot more than they probably ever put into the house.

    It is getting harder and harder to do that. Wholesalers have started offering their deals at retail prices and/or listing them on the mls to max out their profit. So the margins just seem to be narrowing.

    This is the issue with discussing numbers with others. I would guess 100 investors figure their numbers 100 different ways, and then there is the misuse of terminology (I’m probably as guilty as anybody). The other day I heard somebody say he considered forced equity as “unrealized profit”. What the he’ll is that? Haha. Anyway,

    We usually rehab our rentals like a flip and try to be all in at 75-80% ARV, then cash out up to 75% ARV. For cash flow, I consider 300 minimum left over after taxes, insurance, debt service, and property management. This usually works out to. DSCR of 1.5-1.6.

    The reason I don’t subtract vacancy and expense even though I’m aware of them, is because they are too unpredictable. So, I assume with a 300+ a month barrier after the certain costs, that 300 will be enough of a buffer. Repairs and expenses should be pretty low early in and as the years go, increase as everything wears out more and more (another reason I’m not sold on holding the same house a very long time)

    In your opinion is this a bad way to go about analyzing cash flow that way?

    Also I have come to realize that without scale it does not make sense to own just a couple rentals for cash flow. If your going to buy cash flow, carry 10+. Sure it is more doors, more tenants, more liability, but the risk gets spread out and the rentals help cover the others.

    Last point, some people feel like the future is too uncertain to want to wait 20 years for gratification. Over the last 30 years real estate has been great. Rates went from 20 to 0. Now at this moment on for 20 years, maybe it is different. And since I agree with another poster here that the cash flow is mainly used to maintain property until you sell it, a whole bunch of stuff can happen over 20

    • Dave Van Horn

      Thanks David!

      I use a very similar metric in regards to cash flow for my area, so I don’t think it’s a bad way to go about it. The only thing for me now is that the taxes have been going up in the areas I own in.

      The scalability of the 10+ portfolio can make sense but it wouldn’t be a bad idea to expand your location (some towns hold there value better, appreciate better).

      Best,
      Dave

      • David Roberts

        That for replying, Dave. I agree with you about taxes going up. Same here. Yet again another reason you have to be able to raise rent. Insurance, labor, materials, taxes, all keep going up!

        It’s definitely getting harder to hit my minimum cash flow requirement because of the property taxes. Just have to stick to the equation!

        Mom and pop don’t have equations and that’s why they get killed.

  4. John Murray

    Cash flow in the BRRR business is very hard to define. Being a passive income tax payer the benefits are great. All the losses are great through deprecation and other tax write offs. For example my BRRR business lost $8K in tax year 2016. My real rent profit was about $60K, my other passive income was $38K and my refinance amount was $152K. I made about $250K in tax year 2016. My total tax liability (fed and state) was less than $2k. I don’t pay FICA or Medicare anymore, I feel pretty stupid working a W-2 job for so long.

    • Dave Van Horn

      Sure Brian, to put it simply: Make a rate of return on an investment that’s higher than the interest rate on the loan. I mostly refer to it with my HELOCs, investing my equity. Essentially it’s free money you could use to build a portfolio with. This arbitrage isn’t just limited to real estate, you can do with life insurance policies, IRA accounts, etc.

  5. Kevin Felmlee

    When I started investing in 2001 I didnt care about cashflow as much. As long as someone was paying my mortgage and all the expenses I was happy. Now when evaluating deals I need to see some Cash. Its my time & energy placing tenants and dealing with repairs etc. so I want paid for that. But Dave’s right on treating the portfolio as a “whole”. That’s what I do. Dave, thanks for your blogs. they are good reading.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here