The Minimum Cash Flow For A Renatal Property
This question is for all investors out there.
What is the minmum cash flow that you want from a rental property that you expect to keep for a long time?
This question is for all investors out there.
What is the minmum cash flow that you want from a rental property that you expect to keep for a long time?
Nobody will agree with me on this, so I'm jumping in full face.
I will even take a 100. negative for a decent property in a decent area for the long term.
Why?
Long term 1. appreciation 2. Ease of renting 3. Rent increases 4. Tax benefits 5. Learning with less risks
Ease of management.
That said.... even in my area (DC suburbs) I have been able to have good positives (R 1175/PITI 800, 1050/600, 770/465, 1200/840, 1100/735, 1335/800, 825/600, 1250/850) on all of the properties that I have purchased or refi in the last 2 years because of low interest rates and increasing rents. And all of these loans are either 15 or 30 year fixed. I like the slow and steady way of REI and am worth 3x what I was 2 years ago. Just call me cash poor for now.
Hi:
In my humble opinion a minimum positive cash
flow of say $ 200-$ 300 a month will be reasonable to
expect after making mortgage payment, taxes, and insurance. If it is an upcoming market, some investors will be happy to get a good apprecitation. It depends on your particular situation and on what you are looking for ?
sayana
I shoot for a min $150 per unit, Example: a duplex would need to generate $300 total cashflow, SFH would need to be $150 a mo cashflow.
I would never do a negative cashflow deal as you never know what will happen.
[addsig]
IMO you at least want to cover the mortgage payment, I shoot for at least $100 monthly , Any investor knows you won't get rich on the $100 monthly income. At that rate you need at least 20 properties to make $2000 a month . Which still doesn't make alot, The way you make the money on rentals is a holding period in which you hopefully build equity. And hopefully you don't get any non-paying tenants that you have to evict or that destroy your investment.
$200-$250 clear after setting aside enough for a 5% vacancy rate and resonable monthly allowance for maintence costs and a cumulative maintenance buffer.
The rentals I buy are not being run in tip top condition. I want the thing to make me at least $50/mo/unit under it's current conditions and within no time i'll be making more than that.
I agree with, and have similar investing guidelines as Ray. I'm sure that in some parts of the country, negative cash flow properties can appreciate so quickly as to easily more than compensate for the negative cash flow. Unfortunately, this is still a much bigger risk (as some investors in Las Vegas are finding out) than buying something which is already producing cash flow, but which may not appreciate as fast. If your goal is to hold long-term, appreciation over the next year or two shouldn't really matter. Long-term appreciation is almost guaranteed for anyone who buys properties in decent neighborhoods at a decent price. Anyway, cash today is better than cash tomorrow.
I just wanted to get other investors opinion on what is the minimum cash flow that they expect to make. I personally believe in make money when you buy, not when you sell. Every property that I have bought so far in this last year and a half has been loaded with instant equity when I bought it. My stratedy since I invest in the city of philadelphia is to buy properties in areas that are on the upswing. I know that this type of investing is speculative, but since I have lived in the city for 25 years I have seen the changes that are happennig and the reason for properties appreciating tremendously in such a short time. I look for at least a ROI of 15% on my properties. I primarly like to make at least 400 per month cashflow on my properties. May be that is beacuse I will invest in the low -income ares where you can get a property for 30,000 4br 1 bath and rent to section eight for 750 per month. These areas aren't the best right now, but they have the most potential to be good areas in the future because of what is going on the city of philadelphia.
That is a great strategy Oscar and great numbers. Very difficult to get a 4br for 30k in sunny southwest florida.
More power to ya!
[addsig]
That is why your question has so many facets.
1. You know your area.
2. You are paying attention to what it has been, what it is, and where it appears that it is going.
3. If I am building a retirement portfolio and an estate, I will look at the management side today and the potential upside of the future much differently than if I wanted cash today and this was my full time job.
~~ As an example: If every day I want to roll up my sleeves and go to downtown Balto. to manage my properties I would look at cash, cash, cash. If instead, I want to run an ad every 2/3 yrs. get 50 mssgs, talk to 10 , show 5, write a lease and know that rent will be in my bank by 1st + I will never get calls, and my property will be taken care of, I am going to buy in a good area of Columbia and possibly START w/a negative. Long term investment.
One type might have sent me out of the business, be worth less, drained my vision; other might not.
That is why one must hone their vision and goals!
**I am not saying this is right. I'm saying this works too.
Different lives, goals, resources, back up funds, etc.
Hey, Ceinvests – I agree with you.
There are definitely situations where I’ll happily take a so-called "negative" cash flow. But I’ll try to avoid negative ROI, if I can. And I believe there’s a big difference between the two.
I’ll give one example. I bought a property last April that’s running me a little over $100 per month negative. Is that a good deal? Or, bad deal?
If I had a fixed amount of positive cash flow I was trying to make, I probably would have walked away from it. But let me give you a few more of the details.
I had to put $8,000 into escrow to do the deal. However, I received over $18,000 when escrow closed. Which means, I got my money back and immediately netted $10,000. Good deal? Or, bad deal?
Also, when the property closed escrow I had roughly another $20,000 in equity (for a $30,000 total), with none of my money gone. NOW is it a good deal?
The equity since then has appreciated to about $35,000, which currently puts me around $45,000 on the plus side. And my only out of pocket has been a little over $100 per month for the past seven months.
So when I ask myself, should I invest $100 per month (negative cash flow) to do a deal that can make me $45,000 in seven month? Well, I’ll gladly take that kind of deal whenever I can find it.
There’s some excellent ideas and approaches here. But I just don’t understand being adamant about a fixed dollar amount of "positive" cash flow.
I look for properties in the 35,000 and under purchase category, and then rent them reasonably for $650 a month. After mortgage and taxes and insurance, these properties are bringing me $300/month each. Some are in great neighborhoods, some are in rougher areas. So long as you are careful in who you rent to, you can make GREAT money.
In my part of FL, though, the 30,000 properties are getting very hard to find, and there is always a bidding war over them. So we are starting to look in parts of GA. We may not make $300 month profit, but so long as it is $200 I will count it as okay.
I would NEVER have a negative cash flow. Or even a break-even flow. IMHO, and in my experience, those who do that are often the folks who wind up hurting from their investments for a time. I have a cousin who has two homes that she paid 120,000 for and has to rent for about 1,200/month just to cover the mortgage. When that house is vacant for even a month, it hurts her BIG TIME.
I shudder to think of what could happen if she gets a lousy tenant, as sometimes happens, who has to be evicted, so that's 3 month's lost rent, plus absolutely trashes the place and it takes another month to clean it PLUS have to pay for all the fixes, and maybe another to get it rented, because 1,200 is high even in FL. That's $6,000 in lost rent. And even if the house appreciates in value by, say, 15,000, after she pays capital gains and everything, she hasn't made a dime after she replaces the carpets and blinds.
I had a two-month delinquent tenant who smashed pipes and everything. A real nutcase. I had the pipes fixed and the house ready to go in under a month, but it still took me six months to recover financially from three months of negative plus expenses.
LadyGrey,
How will you manage your Ga. homes without lowering your cash significantly?
Heya folks. Kinda new here, but here's how I would look at it.
Essentially, the level of acceptable cashflow will be directly dependent on how cashstrapped you are, and how much risk you're willing to accept (aside from equity, cash out situations).
If you have a substantial cash income or cash reserves, then cashflow is important, but it does give you long term flexibility in the acquisitions of your property. For example, when you believe rents are under-market, or vacancy is high due to negligence, then you may be able to bring rents up sufficiently to meet a positive cashflow level (most relevant in large multi-units, read 20+). Think of it as long-term wiggle room for higher-return but higher-risk situations.
On the other hand, if you need the cashflow to live, then the importance of maximizing cashflow becomes more critical. One way to do it is set a minimum cashflow target (like 50k or 100k per year), then calculate the number of properties you feel you can effectively manage. Use this as a starter figure. Keep in mind, this can change over time as you build a competent management team (economies of scale are your friend 8P).
As a general rule of thumb though, I would shoot for a minimum of the following...
1) Annual costs - (debt service + taxation + vacancy) > annual rent / 10
This means that even with your vacancy factor, it allows for a 10 percent contingency for unusual costs.
2) Internal rate of return > 20%.
The reason I say 20% is that if you buy a property that breaks dead even with 20% down, with 5% inflation over time combined with equity paydown, you'll hit 13.35% compounded return regardless. Factor in increasing inflation on the effect of your rent (keep in mind that your mortgage is a *relatively* fixed cost), and even a dopey break-even building should break 15% IRR. For all the hassle of managing a building and the assumption that you're smarter than the average bear, it's not worth even waking up for less than 20% to 25% if you ask me 8P.
Keep in mind, what's the difference of 15, 20 and 25 compounded over 20 years on $10,000?
15% - $163,665
20% - $383,375
25% - $867,361
If you ask me, if you've got the cashflow and backup, it's worth holding out for that extra return.
Galahad
Quote:If you ask me, if you've got the cashflow and backup, it's worth holding out for that extra return.Galahad,
Don't forget to add that the 25% IRR is only possible if you are able to reinvest your cashflow at a 25% return.
I recently purchased my first 2 rental properties. I decided to buy a resale home in an upscale of Anthem , AZ, and a brand new home in Casa Grande, AZ. Both will be closing escrow early Dec. It will be interesting to see which properties appreciate the quickest (or if at all!) or which property will generate the most positive cash flow. I feel it's a little risky, because the rental market is so saturated right now in Phoenix, but I plan to hold on for at least 5 years. I will settle for a lower cash flow just to get my feet wet. I did not want to put all my eggs in one basket so I purchased 75 miles from each other in hopes I'll make some money. I will hire a PM to take care of the properties.
Would love to hear comments!
Thanks for all your good input as well!!
Sally, if you are holding for cashflow, you should know what your cashflow will be before you buy
Hopefully it will not be 5 years of negative cashflow.
Don't mean to be negative, just heads up for next time
[addsig]
I believe that when you buy a piece of property for investment you should know what you ROI is before you buy. You should know if you will recieve negative cash flow every month or your going to have positive cash flow. You should only take negative cash flow in my opinion if you know the area will appreciate rapidly and you can get a big return after you sell the property. Buying negative cash flow properties and counting in the tenant to be on time with the rent is very risky. ALWAYS run your numbers before you buy the property to see if you van make money, if you cant go on to the next deal.
I'm planning on $75 from the properties I plan to buy early next year. But, then I don't have to put down a dime of my own money either. That makes for a very good ROI.
Is that $75 apiece? Man, you're looking at $900.00 year. That's so slim, it's scary. ONE furnace, 1 roof, 3 months vacancy, and you're in the red for several years. I'd never AIM for $75 bucks a month. Heck, it's almost not worth it unless you get >$200.00, then, if you have 10 of them, you can do ok.