Doing the math: Cashflow, Reserves, Mortgage

[Jim Truman]

Hello,

I'm running the numbers on properties and planning to purchase one over the next year if we can find the right deal. I want to make sure I'm properly calculating cash flow when comparing properties and talking with other investors.  

I read other investors on these forums making statements like they never purchase anything that cash flows less than $500/mo. This seems almost impossible to me unless I'm buying dumps and completely rehabbing the place.  

Take properties on Roofstock for example. Using the numbers they use for estimating expenses, property management, mortgage, insurance, and reserves, I can sometimes find a property that cash flows $500 or $800 per year. No way I'm finding homes that cash flow that much per month.

So I'd like to confirm, when other investors mention cash flow, are they always including ALL expenses, including set asides for reserves? Are they typically paying cash or 20% down? Of course I can cash flow if I pay cash but it seems most investors prefer paying the minimum down.  

I'm find waiting until I find the right deal but I want to make sure I understand what others really mean when they throw these cash flow numbers around.  

Thanks

[Russell Brazil]

Every property is different, every market is different, everyones goals are different.

I'll take a property that has zero cash flow after PITI if it is the right asset, location, market etc. Other properties I wouldnt touch if they cash flowed 1,000 a month.

Yield (the cash flow a property throws off unleveraged, or a dividend stock throws off in a dividend, or a coupon on a bond) is a measure of the risk of the asset and or market.  So these properties that throw off tons and tons and tons of cash flow...are high high risk properties.  A low risk asset in a low risk market, might throw off no cash flow at all if it is leveraged, and might be cash flow negative if it is highly leveraged.  

None is better than the other.  They are different properties, they are different risk factors, and they serve different investors needs, and risk tolerances.  You need to decide both on your personal goals, as well as your risk tolerance.  Many always say they want cash flow...but they dont take the risk of the asset or market into consideration.