CASH FLOW

[Phillip Gonzales]

I know cash is KING but I was hoping from some clarification in the whole aspect of not flipping but buying property and renting it out. I keep hearing this 50% rule and what not, but just want to see if anyone has any insight on what is maybe a "standard among cash flow on properties?  Any info would be grateful I have a number in mind already just want to see what other investors feel. 

[J Scott]

You're basically asking what level of return you should target on your investments. That's going to be a highly personal decision based on your situation and your goals.

That said, I'll give you an example of how I might look at this (somewhat made up, but perfectly reasonable)...

- In 15 years, when my kids are grown and out of the house, I'd like to have 5 times as much money as I do today.

- In order to have 5 times as much money in 15 years as I do today, I'd need my money to grow at about 12% per year.

- Based on that, I would want to have all my money working (invested) at all times and I would want every investment to generate at least 12% returns.

- Unfortunately, it's nearly impossible to have all your money invested at all times (you can't always find investments and sometimes there is time between investments), so to be safe, I'd probably target 15% returns on my investments.

- If I own a rental that's generating $100/month, that's $1200/year.

- So, the question becomes, what is the most amount of money I could have invested where a 15% return would be $1200?

- Simple formula for that: X * 15% = $1200. Solve the equation, and X = $8000.

- So, the most I could spend on that property would be $8000.  Seems crazy...you can't buy a property for $8000!  But, remember, if I'm only getting $100/month, that's probably because I have a mortgage.  Let's say I have a typical mortgage where I put down 20%, and that 20% was $8000, then the purchase price is probably somewhere around $40,000.

So, for my purposes, I would likely want to pay no more than $40K for a typical property.