Minimum Amount of Cashflow

[thepower]

Whats the minimum amount of cashflow your willing to accept when buying a rental?

[mike_mn]

Using cashflow as your only measure of an investment is a mistake. Especially in the type of market most of us are in.

Things to consider:
How much have you invested into the property?
What type of financing do you have?
What are your goals with the property/exit strategy?

These things play a huge roll in deciding if an investment fits in your portfolio.

My biggest mark is cash on cash return. I shoot for properties that return me at least 10% cash on cash, based on 30 yr fixed financing and 10-20% down payment. There are many ratios and things to consider, but this is my minimum standard.

If you have no money invested in a property, then >0 cash flow means an infinate return right? wrong. If you buy a 1-4 unit property and expect it to have 0 vacancy, you are not properly analyzing the property. You need to take into account vacancy with any property analysis.

Some people say $100/mo. That is fine, but what numbers they are basing that 100/mo on is the important thing.

[thepower]

Using cashflow as your only measure of an investment is a mistake. Especially in the type of market most of us are in.

Things to consider:
How much have you invested into the property?
What type of financing do you have?
What are your goals with the property/exit strategy?

These things play a huge roll in deciding if an investment fits in your portfolio.

My biggest mark is cash on cash return. I shoot for properties that return me at least 10% cash on cash, based on 30 yr fixed financing and 10-20% down payment. There are many ratios and things to consider, but this is my minimum standard.

If you have no money invested in a property, then >0 cash flow means an infinate return right? wrong. If you buy a 1-4 unit property and expect it to have 0 vacancy, you are not properly analyzing the property. You need to take into account vacancy with any property analysis.

Some people say $100/mo. That is fine, but what numbers they are basing that 100/mo on is the important thing.

Well mr wolmac, this wasnt posted in the general forum for those new to rei to ponder. This was posted in the landlords forum, where one would think there is some seasoning so to speak.

Yes their are variables that factor into cashflow, so whatever formula anyone uses to calculate hense I asked the question of minimum cashflow acceptable

[mike_mn]

I have no minimum cashflow number.

I have held a property for 1 yr with no rental income from the tenant, because the deal was right. Ended up making approx 100% return on about 40k invested. Could I have made more on other deals...maybe, but this was very little work for me and was a no brainer. The more risk and effort, the higher the potential returns. I decided safe and easy.

Cashflow dollars is irrelivant in my opinion as a measure of whether or not an investment is sound.

[ThreeRiversREI]

Yes their are variables that factor into cashflow, so whatever formula anyone uses to calculate hense I asked the question of minimum cashflow acceptable

Whoa, there. Let's all calm down. We're family here, okay?

There's no one right answer to your original question.

Whats the minimum amount of cashflow your willing to accept when buying a rental?

Am I looking to buy a distressed, possibly even vacant, building, fix it up, get it rented, and then sell it off? If so, I better be prepared for a negative cashflow during the process!

Are there leases about to expire that are significantly below market level? Again, I might be willing to accept a negative cashflow for a few months until the leases expired.

Am I looking to take over the property management personally when the current management contract expires? Yet again, a temporary negative cashflow might be acceptable.

Long-term buy & hold? Well, in that situation a negative would be bad, but how positive is acceptable? That depends on a number of factors.
How does this property fit into the rest of my portfolio?
What would a vacancy do to my cashflow?
How strong/weak is the market?
What other revenue sources (laundry rooms, for example) are available and how profitable are THOSE?

Even after all the above, have I set aside enough reserves to deal with unexpected problems, either from this one property or for my portfolio as a whole? What other opportunities exist? And many other considerations as well. (Property A may have a better per unit cashflow, but only because the seller is offering a 0% note with a balloon in 3 year.)

I've heard people toss around $100/unit/month, but does that really make sense if you're renting a million dollar SFH for $10,000/month? Or is that a reason to pass on a 100-unit complex that is generating "only" $90/unit/month (over $100k/yr total)?

I've heard people toss around 10% cash on cash, but depending on the market that might be unrealistically high, or eliminate chances at the sort of huge appreciation that's happened in Las Vegas.

So the best answer I can give you, and the one I think Wolmic tried to give you, is that there simply is NO simple answer.

[Debbie]

Whats the minimum amount of cashflow your willing to accept when buying a rental?

Wolmic and ThreeRivers are correct in their posts.

But I sense that you would like to know what the experienced landlords are going for acceptable cashflow these days.

In my case, I will not accept anything under $200/mo net cashflow per month. Again, that is net cashflow as in AFTER mortgage, property tax, insurance and maintenance is put away. The rentals we have are duplexes and single family home.

Also, in my case, hubby and I have rentals that are in desireable locations/neighborhoods with an exception of one property that is located in a transitional location. Although we have no problem finding tenant/long term tenant, it is uncertain if we made a wise decision of having the property in a transitional neighborhood. But that's for another topic/another thread.

Currently, our total net cashflows are under $1800.00 per month in which we put away for our children's education fund and retirement fund.

Does my answer help?

[thepower]

Yes Deb, you are correct I was looking for that sort of slant.
& what percentage of your gross rents are expenses running?


To all
What are expense percentages running in your investing area?

In my area they are running around %30-35 percent

[Debbie]

Yes Deb, you are correct I was looking for that sort of slant.
& what percentage of your gross rents are expenses running?


To all
What are expense percentages running in your investing area?

In my area they are running around %30-35 percent

Keep in mind, it changes annually due to full occupation (or not), property taxes going up annually (same goes for insurance and maintenance).

I'll give you the details on my rental homes for the year 2005:

Property one (SFH):
$180.00 mortgage
$ 45.00 insurance
$ 119.50 property taxes ($1434.04 for 2005 taxes)
$ 25.00 future maintenance (repair) set aside
______________
$ 369.50 minus $720.00 rent = $350.50 net monthly

Property two (one side duplex A):
$424.50 mortgage
$ 36.20 insurance
$134.72 property taxes
$ 25.00 future maint. set aside
------------------
$620.42 minus $875.00 rent = $254.58 net monthly

Property three (2nd side duplex A):
$424.50 mortgage
$ 36.20 insurance
$ 141.31 property taxes
$ 25.00 future maint. set aside
------------------
$627.01 minus $875.00 rent = $247.99 net monthly

Property four (one side of duplex B):
$429.75 mortgage
$ 36.20 insurance
$ 262.57 property taxes (NOT a mistake. 2005 property taxes was $3150.88)
$ 25.00 future maint. set aside
---------------
$753.52 minus $875.00 rent = $121.48 net monthly

Property five (2nd side of duplex B):
$429.75 mortgage
$ 36.20 insurance
$ 20.86 property taxes (NOT a mistake. 2005 property taxes was $280.32)
$ 25.00 future maint. set aside
--------------------
$511.81 minus $800.00 rent = $288.19 net monthly

All of the net cash flows gave us $1262.74 per month ($15,152.88 for 2006).

Thanx to the property taxes that has gone up in the last three years, our cash flows has actually GONE DOWN.

Three years ago (or was it four years ago?), our annual net cash flow was just under $1800/month ($21,564 in 2002 or 2003).

Therefore, your cashflow can easily change annually....for better or worse!

What's our ROI? Don't ask me because I REFUSE to deal anything beyond simple math! :icon_aets

[ZNICK]

I like $200 NET as well, but it also depends on the equity I have in it. I'll buy a place and break even, or even lose a bit each month if there's enough equity.

Z

[DSutter]

Here's the problem with saying, what is the minimum or recommended or whatever of a single KPI...

Ready?


There is no single KPI that will tell you a deal is a good or bad investment. Anyone who tells you that their favorite KPI is the best way to look at a deal is just wrong.

The important KPIs differ depending on the type of deal and a host of factors involved. Wolmic gave you some really good advice, you might want to read it again before you so casually dismiss it the way you did.

Deb, have you tracked to make sure your $25 reserve is enough? That is only $300 a year to handle the unexpected that always seems to pop up.

[Debbie]

Here's the problem with saying, what is the minimum or recommended or whatever of a single KPI...

Ready?


There is no single KPI that will tell you a deal is a good or bad investment. Anyone who tells you that their favorite KPI is the best way to look at a deal is just wrong.

The important KPIs differ depending on the type of deal and a host of factors involved. Wolmic gave you some really good advice, you might want to read it again before you so casually dismiss it the way you did.

Deb, have you tracked to make sure your $25 reserve is enough? That is only $300 a year to handle the unexpected that always seems to pop up.

You brought up a very good question, Dee.

The reason why we have a low monthly maintenance reserve is because we already have over $8K in our account for our "rental property emergency maintenance fund".

I really should have pointed that out and I'm very glad you made me do it! :SM009: :icon_aets

[Aldo]

SFH - $200/mo
Multi - $100/mo per unit

[ThreeRiversREI]

You brought up a very good question, Dee.

The reason why we have a low monthly maintenance reserve is because we already have over $8K in our account for our "rental property emergency maintenance fund".

I really should have pointed that out and I'm very glad you made me do it! :SM009: :icon_aets

But adding to your reserves at less than the rate you expect to use them could leave you vulnerable to a double whammy... yes/no?

If a storm comes through and you have to replace 2 roofs, then what?

Just playing Devil's Advocate here. While I want to be a "money grubbing landlord" my partner insists that we continue to be "opportunistic vultures" and do flips a while longer to build up additional capitol & reserves.

My goal for reserves is something along the lines of 2 x (Vacancy Rate x Gross Rent + Readying Costs) + total of all insurance deductibles as a MINIMUM. And add to them on the basis of double the Vacancy Rate & Readying costs amortized over average rental period. (That will start off using area averages & 1 year lease term & evolve with time.)

I figure worst case, eventually we'll end up with a line of credit secured by the properties greater than the minimum reserves I want, I'll drop the cash reserves accordingly, and use the remainder to pick up yet MORE rentals!

[Debbie]

You'll have to realize what items that must be paid out of pocket and what should be filed for insurance.

Roof damaged by storm, of course, would be filed with the insurance.

However, if there's anything involved in lesser damages, it'd be smart for us NOT to file with the insurance company. Therefore, it's nice to have the available money just for maintenance/repair purposes. After all, it's better to earn interest via interest bearing account than to take money and pay it's interest via credit cards.

Nevertheless, in our case, we remodeled quite abit when we first purchased our rental properties. Four out of five properties are only 13.5 - 14 years old and we've already upgraded three of them. Plus, the appliances are now up to date.

Perhaps we're too conservative. But that's okay. Soon, there's a different RE fork road that we plan on not being too conservative. That's okay too!

P.S. - don't forget---we have children hence being a little too conservative. :SM029:

[thepower]

Here's the problem with saying, what is the minimum or recommended or whatever of a single KPI...

Ready?


There is no single KPI that will tell you a deal is a good or bad investment. Anyone who tells you that their favorite KPI is the best way to look at a deal is just wrong.

The important KPIs differ depending on the type of deal and a host of factors involved. Wolmic gave you some really good advice, you might want to read it again before you so casually dismiss it the way you did.

Deb, have you tracked to make sure your $25 reserve is enough? That is only $300 a year to handle the unexpected that always seems to pop up.

Hey "Seasoned Coach" I did not dismiss wolmacs post & was not seeking advice. Re read my post & you'll see that i acknowledged the "variables" that are factored in. & posted said question for discussion...

Easy big fella!

[thepower]

But adding to your reserves at less than the rate you expect to use them could leave you vulnerable to a double whammy... yes/no?

If a storm comes through and you have to replace 2 roofs, then what?

Just playing Devil's Advocate here. While I want to be a "money grubbing landlord" my partner insists that we continue to be "opportunistic vultures" and do flips a while longer to build up additional capitol & reserves.

My goal for reserves is something along the lines of 2 x (Vacancy Rate x Gross Rent + Readying Costs) + total of all insurance deductibles as a MINIMUM. And add to them on the basis of double the Vacancy Rate & Readying costs amortized over average rental period. (That will start off using area averages & 1 year lease term & evolve with time.)

I figure worst case, eventually we'll end up with a line of credit secured by the properties greater than the minimum reserves I want, I'll drop the cash reserves accordingly, and use the remainder to pick up yet MORE rentals!

Three rivers, you could probably slice your reserve requirements if you factored expenses between 40-50 percent of the gross rents when determining your purchase price

[DSutter]

Hey "Seasoned Coach" I did not dismiss wolmacs post & was not seeking advice. Re read my post & you'll see that i acknowledged the "variables" that are factored in. & posted said question for discussion...
You think posts like this foster "discussion"?

If you posted it for discussion then you should be delighted with the insight offered by those who gave you more than just a number answer.

If you were looking for confirmation of the metrics you use then perhaps you could say something like...

"Hey, I try to get $X cash flow on each of my rentals. I use that number because blah blah blah. What do other landlords do?"

That would've probably elicited a "discussion" more along the lines you are indicating you desired.

But, when you are buying a property it is lunacy to use a single metric. What is that you say? You weren't talking about buying a property? Well guess what? You should be treating every time you have to weigh sell vs. keep vs. refinance as a "buying" decision requiring the same level of due diligence you expended when you originally purchased.

But, as others here have said, to each their own.

[thepower]

You think posts like this foster "discussion"?

If you posted it for discussion then you should be delighted with the insight offered by those who gave you more than just a number answer.

If you were looking for confirmation of the metrics you use then perhaps you could say something like...

"Hey, I try to get $X cash flow on each of my rentals. I use that number because blah blah blah. What do other landlords do?"

That would've probably elicited a "discussion" more along the lines you are indicating you desired.

But, when you are buying a property it is lunacy to use a single metric. What is that you say? You weren't talking about buying a property? Well guess what? You should be treating every time you have to weigh sell vs. keep vs. refinance as a "buying" decision requiring the same level of due diligence you expended when you originally purchased.

But, as others here have said, to each their own.

"Seasoned Pro" you are correct, to each their own. Unless you knew my intent upon posting the thread then its not best to assume or speculate. If the mods have a problem with my question then they can simply delete the thread...

[DSutter]

"Seasoned Pro" you are correct, to each their own. Unless you knew my intent upon posting the thread then its not best to assume or speculate. If the mods have a problem with my question then they can simply delete the thread...
Uh huh, sure son, whatever.

[Burke]

Way to encourage posting Mod.. Arent you supposed to be mod?

Moderators have the word "Moderator" under their user name.

[DSutter]

Way to encourage posting Mod.. Arent you supposed to be mod?

What on this big, round, mostly blue planet gives you the impression that I am a mod?

[Debbie]

Time Out!

Anyone have any questions regarding the cashflow?

[Dan Auito]

I always look for $200.00 after all expenses.

[Aldo]

$200 is good for SFH's, but $100 per unit works well for multi's.

[Jim Johnson]

Whats the minimum amount of cashflow your willing to accept when buying a rental?

I have been looking at this thread for a while now and I guess have not responded because the question is very open ended.

When I look at a 'rental' property 'cash-flow' is a small part of a analysis process. Really to sum this post into the Cliff Notes Version, I look at total benefit and not any one component of the analysis. In most cases the smallest part of my return, when looking at rentals, is the cash-flow.

Looking at the first year, i use a process called APOD. It gives a one year snapshot of the investment. From that point I switch to a 10 year benefit process that switches from basing return on 'investment dollars' to 'equity'. The is a much more accurate way of tracking how long one should keep a investment property. If there are questions we can discuss this further....

OK... now for a look at two of my properties...

1) single family home... bought it for $245,000. Same renter for 6 years now... the property 'cash-flows' about $200 per month... but it is now worth about $375,000- and it goes up like clockwork every year. The renters take care of all maintenance and repairs. I invested about $30,000 into the home and have fixed rate loan at 5.25%. We keep it because it is easy, I would make more if I were to 1031x the home, these people will probably never move.

Note my total benefit- including depreciation is quite good. My cash-flow is low... but so what. Also... I have never bumped the rent... and do not believe in moving rent as long as someone stays put. To me that is a win-win for both sides. Also... they could never move into that same home for what they pay me... so that keeps them stable and pays off my house.

2) 4 unit I bought for $185,000 in a hot part of Denver. Redevelopment area where homes are scraped. I invested about $20,000 into the home and have a loan at 5.25%. It cash-flows $1200 per month and is now worth about $500,000 as a scrape. As a income property it is worth closer to $450,000. I am actively securing options on the properties to each side of me, which both have out of state owners. If I put all 3 properties together the value of each will go to about $600,000. The others are not managed well and I will have options around $350,000 or $375,000 on each.

So great cash flow but not such a good return on equity. I hold it for the land play value, I that dumps I will 1031 the property into an apartment building.


So the big question I have for you is this... why is 'cash-flow' important? When people single out one part of the equation... there is normally a reason behind it. You spoke of others not knowing your end game... well... where are you going with this post? Do you need the cash flow to make ends meet? Is investing your 'business' or your 'job'?

In fairness I should say I invest as both... but differently. And knowing what I expect to get out of the property determines how I buy it and what I expect from it. My long term holds I base on 'return on equity'. My 'job' investments I base on a 'cash on cash' and total percent return. One might equate 'cash-flow' with 'cash on cash', which you can not do. Though 'cash on cash' has a cash flow component.

[mike_mn]

Unless you knew my intent upon posting the thread then its not best to assume or speculate.

This is a very good point and I for one should have responded differently to your thread. I am curious of your intent with your initial post. What are you hoping to learn from what peoples minimum amount of cash flow is? Knowing this, I may be able to answer you better.

[thepower]

Jim, that was a excellent post thanks for the breakdown.
Wolmic, glad you didnt jump to the wrong conclusion bud. I left it open ended to foster discussion, but ill get to the jist of it.

Similar to what Jim described in his post, i have almost the exact same scenario except with lesser cashflow on the 1st. Which i bought when first started in 04. It cashflowed only 60 bucks, however it has appreciated to the point to when i sell it this spring I will have doubled my money. Now that sounds good, however i now realize that i bought it wrong & if it wasnt for a great tenant similar to what Jim described in his "Single Fam Home". Id have an alligator on my hands.. The play above was speculatory at best & if it did not appreciate & I had a run of bad tenants, id be ate alive.

One of my other places, I bought properly, at a discount, was able to cashout refi, get back double my down payment & have a cashflow of 100 after all expenses. On this one, if I have a string of tenants, Id be ok because 1. my money is out of the deal, & 2. by counting expenses at %40 percent of the gross(even though I self manage it) I can cover for a run of potentially bad tenants.

Now on scenario number one, yes appreciation is good, but what if the property doesnt appreciate because of the high forclosure rates nationwide? Also on the first, I did not run expenses even close to 40percent. So a bad tenant or period of vacancy would have ate up reserves at a quick pace while I speculated on appreciation.

So the point of the post was to get a sampling of the other landlords of the board on how they play the holding for cashflow vs holding for appreciation/low/no cashflow

[ThreeRiversREI]

So the point of the post was to get a sampling of the other landlords of the board on how they play the holding for cashflow vs holding for appreciation/low/no cashflow

Don't know if you've read about the deal I'm looking at here (http://www.magicbullets.com/forum/showthread.php?t=6182).

As I implicated in my earlier response in this thread, its a lot more than cash flow that makes a deal a good one or a bad one.

With the above deal, I'll start off with negative cash flow, but selling one of the buildings will cover that AND pay for the rehab needed to get it cash flow positive AND provide a substantial cash reserve as well. When the work is done & all the units are rented, the 2 buildings will be worth more than I paid for all 3 and it should be throwing out about $150/unit (almost $1k/month) in cash flow 6-12 months down the road. And that's BEFORE I examine the possibility of refinancing the debt to get a better interest rate from a commercial lender.

[thepower]

Don't know if you've read about the deal I'm looking at here (http://www.magicbullets.com/forum/showthread.php?t=6182).

As I implicated in my earlier response in this thread, its a lot more than cash flow that makes a deal a good one or a bad one.

With the above deal, I'll start off with negative cash flow, but selling one of the buildings will cover that AND pay for the rehab needed to get it cash flow positive AND provide a substantial cash reserve as well. When the work is done & all the units are rented, the 2 buildings will be worth more than I paid for all 3 and it should be throwing out about $150/unit (almost $1k/month) in cash flow 6-12 months down the road. And that's BEFORE I examine the possibility of refinancing the debt to get a better interest rate from a commercial lender.

3, as i posted on your thread, alotta if's in the scenario you described..Ifs=speculation in some instances.. Hope it works out for you.
Its all a matter of investment styles..

[ThreeRiversREI]

3, as i posted on your thread, alotta if's in the scenario you described..Ifs=speculation in some instances.. Hope it works out for you.
Its all a matter of investment styles..

The if really comes down to IF I can get the owner to sell for a reasonable price. The rest really falls together at that point. Another (non-profit) investor has been trying to buy the one building for some time, cash, and isn't getting anywhere.

IF I can get the seller to sell to me on reasonable terms, that parcel gets wholesaled the same day.

IF I can get the seller to sell to me on reasonable terms, said wholesale transaction provides ample cash for the "lipstick" rehab of the other two parcels. They're not renting due to excessive deferred maintenance and seriously dated decor.

IF I can get the seller to sell to me on reasonable terms, said wholesale transaction ALSO provides ample cash reserves for carrying costs and capital improvements.

But for the purposes of this thread, I'm willing to start off in a negative cash flow position because I know correcting the 50% vacancy rate (75% vacancy if you include the parcel that will immediately be wholesaled) will be straightforward, and once corrected will provide a positive cash flow.

[thepower]

The if really comes down to IF I can get the owner to sell for a reasonable price. The rest really falls together at that point. Another (non-profit) investor has been trying to buy the one building for some time, cash, and isn't getting anywhere.

IF I can get the seller to sell to me on reasonable terms, that parcel gets wholesaled the same day.

IF I can get the seller to sell to me on reasonable terms, said wholesale transaction provides ample cash for the "lipstick" rehab of the other two parcels. They're not renting due to excessive deferred maintenance and seriously dated decor.

IF I can get the seller to sell to me on reasonable terms, said wholesale transaction ALSO provides ample cash reserves for carrying costs and capital improvements.

But for the purposes of this thread, I'm willing to start off in a negative cash flow position because I know correcting the 50% vacancy rate (75% vacancy if you include the parcel that will immediately be wholesaled) will be straightforward, and once corrected will provide a positive cash flow.

1 to many ifs has the potential to morph into an alligator. However if you were to pull it off, Id be the first to post in your thread congratulating you.
War Mike Tomlin

[ThreeRiversREI]

1 to many ifs has the potential to morph into an alligator. However if you were to pull it off, Id be the first to post in your thread congratulating you.
War Mike Tomlin

:icon_aets Careful. I might hold you to that! :icon_aets

I admit, I'm probably a bit overly attached to this deal, but that's just because it has the potential to do so much good in so many different ways. That, and either the seller takes my offer (and the rest is a slam dunk) or the don't (and I can't get myself into too much trouble).