What target cash flow % should I go for on the first one?

[Karen M.]

Hi BPers -- I have a Friday question for you!

So, right, I have been hanging around here for a little more than a year now, on and off, getting my head straight on what we want for a rental property.

I am still working to establish criteria and firm up the vision.

Here is where I am at:

1.  We want a property that is close to home.  We will self-manage and I want to learn the business and management side. 

2.  We want a property that won't cost too much to get into.  However, we will likely want regular bank financing for the first one.  So target price range is $50,000 - $100,000 and our down payment / initial out of pocket costs would be $15,000 - $30,000 to get a first property.

3.  Property quality and neighborhood quality matters.  When I buy stocks, I am looking for appreciation and cash flow (I want and buy stocks / businesses that are basically solid, steady, reliable,  cash machines over the long haul. Many stocks throw off dividends and appreciate.)  I want basically the same from rentals.  They have to hold their value.  The neighborhoods have to be attractive long-term.  The homes need to be good homes.  Appreciation can be slow and steady, that is fine.  

So here is the question -- how much cash flow should I target for a first property?  Will I be successful if I get 1.5%?   Will that be pretty much a "sure thing"?   2% is a sure thing, yes?  I remember Brandon saying on a podcast that 1% is the bare minimum.  Do you agree with that?  

Where is your balance between cash flow and appreciation?   Do you calculate solely on cash flow?  

I am in the position where I need the first property to WORK.  It is important to be careful. If you were me, what cash flow percent would you look for?

Am I looking at the wrong metric?  

Right now, I am taking more time to brush up  and organize / automate our personal finances and build more cash cushion / safety net.  I love stock investing and that is still my first focus, but we will diversify into a rental.  I have paused looking at homes on Zillow until I get my financial goals super-clear.  Then I will try to get the neighborhood super-clear.

Thank you for any advice!

[Shawn Holsapple]

@Karen M. it sounds like you're on the right track by "hanging" out on BP!

The 2% rule is hard to find with "good" properties.  Usually the higher the return, the higher the risk.  Yes, you can find a property that meets the 2% rule but it will usually not really cash flow that well.  For example, when I first got started, I was really drawn into the "sexy" thought of buying a home for $25k [all-in] and renting for $500+.  At one point, I had over 22 doors like this.  After six months I quickly realized this wasn't what I thought it would be and was going to be as fun as I had imagined.

Fast forward a few years and now I only own properties that are built after 1945 & rent for $700 or more.

I now shoot for $200 net after all expenses and debt service.

I also own all of my properties with zero money invested.  I use my own cash or that of a private lender to buy the as-is property and then fix up.  Once it shows well, I go to a local credit union or State Bank and get it refinanced for 75% of the now appraised value - which covers all my principle and covers the profit I pay the private lender.  Then rinse and repeat.

IF you're going to self manage, I suggest getting Mike Butlers "Landlording on Autopilot".  It has a ton of great info and will save you a lot of headaches.

IMHO - I would not self manage and hire a good PM.  Even when I just had the one property, I had a PM.  I know there are good arguments for this here on BP.  For me, it's about the price of time [which is priceless].  I will gladly pay someone $70 to handle the month to month issues that pop up with a unit while I spend that hour I save [or sometimes several hours more] each month doing something with my family or doing the next deal.

With all that said, you mentioned you've been thinking about this for over a year now [probably longer].  My biggest mistake was to wait too long to buy that first one.  I waited over 2 years and now kick myself for waiting so long!  I challenge you to get off the fence and buy something..NOW!  Otherwise, you will never find the "perfect" deal.  Just get one under your belt and you will learn a ton.  Even if it sucks [and some will] you are at least moving forward and getting your education out of the way.

So many people tell me that "one of these days I'll get into REI". Heck, "one of these days" was 2 years ago!

I hope that helps a little and good luck!