What is a good Cash Flow percentage or is there one. New investor

Question

I am currently in the process of writing out my business plan and I would like to add some info about how I plan to manage my cash flow. What is a good cash flow percentage ?

Christopher Phillips · Answer

@Tony KarnsWhat's considered a good cash flow is relative to individual investor and location.If you can only earn 1% on your money in a savings account, you'd be better off earning 3% or more on a rental property.But if you were already earning 9% or more somewhere, you probably wouldn't want to be in an investment for less than 10-%-12%.So, you have to decide what you wish to earn on your money and also consider how one investment is more liquid than another investment and how much you want to earn versus the risk involved.

Jeff B. · Answer

@Christopher Phillips, GOOD insight! There's not magic number if it's a SFR or MFU.You need to decide if Y O U are happy with the deal.IMO, 'managing CF' is about "what do I do with the income", not What CF do I require. Sounds as if you are prepping for an LLC?

Michael Lucero · Answer

I'll try and answer this down below assuming what I think you are asking, but here is my thought process response to what you wrote just so you can see it. There is no one size fits all answer here, the return that people want is impacted by an almost endless amount of factors. It entirely depends on the individual and considers such things as how risk averse they are, are they looking for growth or capital preservation, what deals can be found in their area and are they willing to invest in areas out of their vicinity, etc. Also, the term "good" is WAY too general here and asks us to assume way too much. Do you mean factually a good return based on the risk/reward in comparison against stock market, start ups, the lottery, CDs, etc. Also, what a person would perceive as a good return can mean completely different things to various people. Someone who is a millionaire and wants capital preservation may want a 4-5% return to safeguard against losses, so that is an acceptable return for him and one he may consider "good" for that purpose, when he knows a 4-5% return is horrible in the grand scheme of things. Furthermore, are you asking for someone's input into what they think should be a good return for your business, because if so, you haven't provided any information. Based on your question and the fact that the question was written on a real estate website, it seems you are asking for a % that is generally considered a target, acceptable, "good" cash flow in real estate investing, which I presume is on a rental business. Note that there are numerous different cash flow calculation methodologies, but one popular calculation is cash on cash returns (COC). COC is basically your annual cash flow (revenue minus expenses), expressed as a % of cash investment. It's sort of your return on investment (but not entirely since it doesn't really include equity increases from mortgage payments, tax savings, and potential profit upon selling the house). Generally, a "good" return ranges from 7-15%, with 10% being the acceptable lower limit for a lot of people, 12-15% being acceptable/very good # to hit and anything above this is amazing. When you are considering investments and businesses, you think of the returns you can get in other markets, investments, and the risk and effort it takes to get that return. Think of the stock market which has historically returned like 8% or something, yes it has risk, but requires little effort if you are a passive investor. Therefore, most people would probably want a higher return than the stock market if they are going to go out of their way to do real estate investing which takes energy and time. At the end of the day, just make sure you are at least cash flow positive (you make more money than you spend on expenses) when you are getting started. Yes there is a cost to becoming educated, but that doesn't mean you need to lose money, but rather, the cost of learning may just be the difference from a goal 10% return and what you actually get 2-7% return, but you're learning.

Christopher Phillips · Answer

@Tony KarnsActually, the question was structured correctly. The answer is individual in nature.Cash flow and cash on cash return should be positive. How much so depends on what your area might average and what you are willing to tolerate given your goals and the risk involved. In some areas, it even breaks down between A,B,C,D neighborhoods. Usually, the higher the return the higher the risk involved.If you are targeting a B or C area that can only get 3% cash on cash return, then that becomes your minimum goal when searching for prospects. If you're willing to tolerate higher risk in a D or E area then you might set your minimum at 10%.

Tony Karns · Answer

thanks for the advice guys. So I guess maybe the question was structured wrong. in my readings I have come across the term "Cash-Flow on hand". I was curious to see if there was a ideal percentage that should be maintained .yes I am getting ready to launch one.