Cash Flow On Yours?
I am just interested, and I have probably even asked before, what some of you guys have as cash flow on your properties. I am closing on a duplex at the end of the month that will afford me just 375 a month after mortgage and expenses, but that's a lot more than most of the properties I looked at where the cash flow was just enough to cover expenses and no more. I am just curious what other's of you experienced upon initial purchase of your properties as far as initial cash flow, would you mind sharing so I can get an idea of a benchmark and what the market is like when and where you bought. In Seattle, the market is almost always priced high and hot. Thanks! Keely
I second the comment of bnorton... $200 or more cash flow and the deal is worthwhile for me... $375 sounds like a solid deal as long as its after PITI and management expenses...
Good Luck!
[addsig]
When evaluating a potential rental purchase, how do you calculate cash flow. Rent - PITI = cash flow ?? This would not leave any allowance for repairs, maintenance, and vacancy. What value do you use for these expenses? They can vary a great deal from property to property and I don’t know how you would predetermine them with more then an educated guess
Correctly calculated the cash flow should be the net operating income plus PI. This means PI and other costs are deducted with reserves being used for costs that are irregular.
Property management
Repairs
Vacancies
Advertising and other tenant acquisition costs
Misc charges like having the driveway plowed if that applies. Gardening if the tenant does not pay
Utilities that are covered by the landlord (water, sewer and trash as sometimes covered by a landlord)
Pretty much everything and anything thing that can be estimated should go into the NOI calculation.
If the number is then positive you have a safe deal. The idea being you are getting paid each month to hold onto the deal when the NOI is clearly positive.
PI is not included in NOI as not every property will have debt service. To use leverage is a separate decision from what NOI tries to highlight.
So, NOI plus PI (if there is any) to get positive cash flow.
John
PS. Yes, this can make it tough to find a deal given some markets.
[addsig]
I shoot for minimum $150 a unit. Breaking even income is dangerous and negative cashflow is no good
Quote:
On 2004-09-13 11:46, active_re_investor wrote:
Correctly calculated the cash flow should be the net operating income plus PI. This means PI and other costs are deducted with reserves being used for costs that are irregular.
Property management
Repairs
Vacancies
Advertising and other tenant acquisition costs
Misc charges like having the driveway plowed if that applies. Gardening if the tenant does not pay
Utilities that are covered by the landlord (water, sewer and trash as sometimes covered by a landlord)
Pretty much everything and anything thing that can be estimated should go into the NOI calculation.
If the number is then positive you have a safe deal. The idea being you are getting paid each month to hold onto the deal when the NOI is clearly positive.
PI is not included in NOI as not every property will have debt service. To use leverage is a separate decision from what NOI tries to highlight.
So, NOI plus PI (if there is any) to get positive cash flow.
John
PS. Yes, this can make it tough to find a deal given some markets.
Thank you for that formula! This will make my decisions much easier.
TCI is so helpful sometimes, I could just cry.
I mentioned it before, but I don't like dollar amounts. If you have ever spoken to someone who lives in an area where housing prices have declined(every area sooner or later), you will find out that a place that rents for $750 can easily become a $500 place. It's not fun to be paying out money at the same time people around you and maybe even in your own office are losing their jobs. I like to stick with GRMs. I doubt you could get a decent GRM in Seattle, but in most areas of the country it is wise to pay 5 X gross annual rents or less for rentals. I personally only buy if I can do better than that. It's kind of like the old saying about there's no substitute for cc's. There is also no substitute for rents compared to purchase price.
Active_RE_Investor,
I would have to disagree with your assessment of valuing property. If you dont have PI, then you want to consider the return on your invested $$. If you pay all cash for a building and the rents still only cover the other expenses, I dont think youll find anyone here that would say thats a good deal.
Ryan
Hello,
Newbie question here,
I keep hearing people say that they dont invest unless a property Cash flows $200 or $150 a unit.
Well that sounds great and all, but I would like to hear what your Debt Service Coverage is?
To simplify this...
Person A)
Could be dealing with properties in the $200k range. Where the Cash flow per unit would be X amount.
well...
Person B)
Could be purchasing properties in the $100k range. Well, the Cash flow here would be Half that?
And along with all this, there is the fact that some people put down 0% with 80/20 loans... others put down 5%... others 20%... well this all effects cash flow also. But thats a whole other can of worms.
So anyhow, one calculation that seems to work for ALL deals is the DSCR.
I have been using 1.2 for a Debt service amount. If I cant get a property to meet this criteria, then I move onto the next one.
any comments on this?
Quote:
On 2004-09-13 20:13, davmille wrote:
I mentioned it before, but I don't like dollar amounts. If you have ever spoken to someone who lives in an area where housing prices have declined(every area sooner or later), you will find out that a place that rents for $750 can easily become a $500 place. It's not fun to be paying out money at the same time people around you and maybe even in your own office are losing their jobs. I like to stick with GRMs. I doubt you could get a decent GRM in Seattle, but in most areas of the country it is wise to pay 5 X gross annual rents or less for rentals. I personally only buy if I can do better than that. It's kind of like the old saying about there's no substitute for cc's. There is also no substitute for rents compared to purchase price.
I'm trying to understand your formula...so what you are saying is the most you should pay a rental that rents for $1000/month is $60,000?? That seems awful low...in my area the monthly rent usually runs around 1% of the value of the property....
John,
Can you spell out (give an example with numbers) on how you do this?
Lets say a Duplex selling for 150.000.00
rents are lets say 1500.00 a month X 12 = 18000.00
mortgage of just Principal and interest is 997 a month on a fixed 30yr loan at 7% now taxes and insurance is another 210 a month (broken down) making a payment of 1207.00 a month so it looks like you have 300.00 PCF but lets say there is a 5% vacancy rate per year and maint is roughly 800.00 yr.
Tenants pay all utils.
Thanks
Quote:
On 2004-09-22 23:16, John1212 wrote:
Hello,
Newbie question here,
I keep hearing people say that they dont invest unless a property Cash flows $200 or $150 a unit.
Well that sounds great and all, but I would like to hear what your Debt Service Coverage is?
To simplify this...
Person A)
Could be dealing with properties in the $200k range. Where the Cash flow per unit would be X amount.
well...
Person B)
Could be purchasing properties in the $100k range. Well, the Cash flow here would be Half that?
And along with all this, there is the fact that some people put down 0% with 80/20 loans... others put down 5%... others 20%... well this all effects cash flow also. But thats a whole other can of worms.
So anyhow, one calculation that seems to work for ALL deals is the DSCR.
I have been using 1.2 for a Debt service amount. If I cant get a property to meet this criteria, then I move onto the next one.
any comments on this?
Hello Davese,
I am new to this, VERY new, so don't take what I say to the bank, or anywhere else for that matter
So anyhow....
From what I calculated this would have a debt service of 1.12
I came to that number by:
Dividing (Net operating income) $16,290
by
(Annual Mortgage) $14,483
to get
(Debt Service Coverage Ratio) 1.12
I am in search of properties that meet a 1.2 criteria. Which may be a tad advantageous.
Any comments are ABSOLUTELY welcomed. I would love to know if I am being too pessimistic or optimistic, or if I am just Nuts alltogether.
Thanks!
nic3456,
You are correct in your use of the formula. It really is that simple. However, I would not agree that you can rent a $60k home for $1000/month in most places. Usually you have to slide down the scale further to get good cashflow. Most people in my area who go for cashflow will not spend over $40k on a house. I usually like to get houses in the $35k or less range. I can't think of a home that I currently own that rents for less than 2% purchase price/month. Rents of 1% mean you have a negative cashflow most of the time.
That's sounds like a pretty good idea, just getting a cheaper property and keeping fairly good cash flow....what kind of luck to you have with renters?...Since I am very close to the Univ of KY i have a lot of college kids.....but to find something around 35-40K would put me me at a lot of risk (assuming i am right on the types of renters i would get on a 35K property.) or put me into bad areas....around here your basic 3 bed 2 bath 1000 sq ft condo/townhouse runs 80-95K and rents for 900-1000? how prevalent are decent 30-40K houses in your area?
Quote:
On 2004-09-23 22:24, davmille wrote:
nic3456,
You are correct in your use of the formula. It really is that simple. However, I would not agree that you can rent a $60k home for $1000/month in most places. Usually you have to slide down the scale further to get good cashflow. Most people in my area who go for cashflow will not spend over $40k on a house. I usually like to get houses in the $35k or less range. I can't think of a home that I currently own that rents for less than 2% purchase price/month. Rents of 1% mean you have a negative cashflow most of the time.
DaveT had quite a few discussions of the Debt Coverage Ratio and its value in determining the income potential of a rental property. Do the Forum Advanced Search for DaveT's topics containing the keyword "DCR" in the Landlord Forum.
He boiled down a lot of discussion to two simple formulas
( NOI ) - (Debt Service) = Cash Flow
( NOI ) / (Debt Service) = DCR
Then he summed up as follows: The first formula tells you how much cash flow you will have. The second tells you whether the cash flow is large enough to support the property.
BTW, DaveT suggested a minimum DCR of 1.25
i think the problem is that people typically want "one formula" that gives them a yes/no if they buy a property and it will definitely make money. that doesn't exist.
there are two main ways of assigning a value to a property based on the income that property produces. one is cap rate, one is gross rent multiplier...
prop value = (net operating income) / (cap rate)
prop value = (total rents) * (gross rent multiplier)
the problem with both these approaches is that the cap rate and gross rent multiplier vary by both property type and location and you really need to understand your market to know what to expect. over time, you can get a feeling of what you can expect in your market and jump when you see an opportunity to get a better deal than market.
in general, you should not even look at a property with a cap rate (noi/price) less than 10% or a grm (price/monthly_rent) less than 100 unless you see a way to dramatically change the property. these numbers can vary, but they are good ballparks to start with.
ok, that is valuation. on top of that, you have to consider cash flow. don't even go near a property with negative cash flow. that is speculating, not investing. you will need to use excel or a financial calculator, but you should also calculate your "internal rate of return" on each property. this is a way of comparing different types of investments, as it only takes into consideration a string of cash flows. you can compare stocks to real estate to cd's if you like, it kindof levels the playing field. you would like to see your IRR above 15% or so before you even consider a deal, and hope to see much higher than that.
one of the major functions of the IRR is the initial down payment, since it is the amount of cash you invest in the beginning. the amount you put down will depend largely on how much financing you can get. this is where the debt coverage ratio comes in. a dcr (noi/debt_svc) of 1.25 or more means to a banker, and you, that there is a low risk that you won't be able to make your payments due to unforeseen circumstances.
these are just a few of the figures you need to concern yourself with when dealing with income property. the fact is, in residential real estate, many of these figures go out the window because our buyers are often families looking for something that "feels nice" and not people buying for a return on their money. therefore, in order to properly arrive at a value, you cannot get around looking at comps as well. you may be able to get a great property with a cap rate of 20%, grm of 50, and dcr of 3, but if the comps don't support the value, a lender will not loan you money because if you default, they have no collateral to sell.
it is hard to find a property which fits within all the constraints, since everyone is out there looking for the same thing. on top of that, you are also competing against people who don't know how to calculate many of these numbers and are leaping blindly into foreclosure and/or bankruptcy by purchasing way above market value. don't make that mistake.
another point that almost everyone seems to miss is that you need to consider these ratios when you sell as well. if you are selling a property at a price which doesn't fit any accepted investing criteria, expect it to take a long time to sell. properties at 10% cap, 100 GRM, and 1.25 DCR with 80% down that have good comps for their price will have little trouble selling.
good luck and have fun!!