What is a good amount of cash flow for rental income.

[Guy Primo]

I am looking to purchase a condo. Here are the numbers I came up with for this property. What do you think of these numbers? Looking to purchase my first income property already have single family. Is this a decent cash flow with these numbers? Location Rhode Island.

Condo Price $157,000

First Year Income and Expense Monthly Annual Income: $1,300.00 $15,600.00 Mortgage Pay: $568.97 $6,827.59 Vacancy (5%): $65.00 $780.00 Property Tax: $188.00 $2,256.00 Total Insurance: $66.67 $800.00 HOA Fee: $20.83 $250.00 Cash Flow: $390.53 $4,686.41 Net Operating Income (NOI): $959.50 $11,514.00

[Bill B.]

@Marisa R.

Yes Marisa he should still expect some maintenance but in the condo it would mostly be water heater/ac and kitchen appliances divided by remaining useful life. But, depending on the age of the building he could also be hit with an Hoa assessment for a new roof, painting the outside or parking lot maintenance. That’s why you’re usually give 7-10 days to look over their cc&rs. To see how much money they have in reserve and what limitations you face with the property. (Rentals might not even be allowed.)

[Guy Primo]

@Bill B. your property tax goes up when it’s not owner occupied?  

[Bill B.]

@Guy Primo

1) Somethings up with your device, you’re posting constantly. 

2) The 1% rule isn’t a rule and it rarely make sense. People with lower end housing ($50-$60k) would never make any money with the 1% rule, they use a 2% rule. people with $300k - $500k houses will never get 1% and they can still make money. 

3) I was the one that said property taxes go up when the property isn’t owner occupied. Because that’s been true everywhere I live but I don’t know it’s a fact in every state. Houses that the owner lives in are usually “homesteaded”. That means limitations on taxes and usually losing it  during a lawsuit. (Like oj’s Florida mansion). But the property I bought in MN had the property taxes go up 50% when it became my rental from $3300 - $5,000. Look at the property listing  see if in the taxes area it says “homesteaded” or something similar  

It’s just like the $100/door “rule” I make $700-$1,000/door per month but my properties are 5 x more expensive than the ones Brandon was buying when he made that rule. 

Edit: here’s google’s take on it. 

The exemptions discount property tax by "exempting" a certain amount of a home's assessed value from taxation. ... The City of Providence no longer has a homesteadexemption, but Providence has a lower property tax rate for owner-occupied dwellings, and a higher rate for non-owner-occupied homes.May 31, 2017

The exemption is up to 20 percent of assessed value in East Greenwich, Johnston and North Providence. The exemption is limited at 15 percent in East Providence, 40 percent in West Greenwich, and 10 percent in Narragansett.

[Nakia Addison]

To determine if this is a good deal for you, I would recommend having a cash flow criteria for every rental investment. For instance my cash flow criteria is that the investment propert must cash flow between $500-$1000 per month. Take into account your purchase price to rent ratio. That is where the 1-2% standard applies and must be realistic to your purchase price.

[Daniel Kidd]

@Guy Primo

For an accurate account of the 1% rule that includes a HOA expense you need to add the monthly HOA directly to the calculated 1% rent. So if you have a 100K property with a HOA of $100/mo then you would need the rent to equal $1100/mo for it to still follow the 1% rule. This applies to any and all fees outside of the regular. What this really means is that, as far as rental properties go, for every $1 of HOA fees charged on a property you have lost $100 of the equity potential of that property. This may not be a rule that can carry into every market, but when I see a condo that should sell around 75K selling for 50K I have generally found that it has a $250/mo HOA fee with it. I also generally avoid these as a rule because I don't like the idea that someone could limit my ability to choose between a long term and short term rental opportunity on a property or up the HOA and kill any equity that I have in it at a $1 to $100 ratio.

Also for IRR or internal rate of return you should consider tax depreciation and taxes paid on the mortgage in your numbers for ROI because they allow your CoC to be what it actually is before and after taxes and then some. Principal pay down and any equity you have in the property is gaining at a rate equal to the rate of your loan (5% if the rate of your loan is 5%) and appreciation is fun to consider but generally follows the same rate in the long run as the rate of the depreciation of the dollar or worse, so you get a net zero there unless you happen to get lucky.

[Lane Kawaoka]

I would look for 100-300 a month on turnkey rentals after expenses and vacancy.

[Guy Primo]

@Daniel Kidd @Lane Kawaoka thanks for this information this is all good info. 

[Dave Toelkes]

@Guy Primo,

While I aagree with those who have noted that your maintenance and HOA fees need to be reviewed, this may be a good enough deal if the numbers you gave are valid.

First, forget the 1% rule. That rule was popularized by Robert Allen and Carleton Sheets back in the 1980s when the thrust of their programs was purchasing single family homes with no money down. Back then, it was possible in many rental markets to get a monthly gross rent of about 1% of the purchase price and still have an acceptable NOI with the seller financing the entire sale or having the buyer assume the remaining balance on the seller's mortgage loan. That was back then. Since then property price inflation has dramatically outpaced rental inflation, lending rules have changed making non-qualifying assumable mortgages non-existant, and seller financing is difficult if not impossible to get. Also gone are the 95% LTV investor loans.

Today, you have to use metrics that make sense for your own goals and cashflow requirements.  Someone buying rental property today to provide a source of income in retirement 30-40 years from now has a different set of metrics to screen a potential purchase than someone who needs cashflow today to replace their current W-2 income. 

The person buying today who does not have an immediate need for the rental income knows that in 30-years, the tenant's rents will have paid off the property and a free and clear property will provide a good source of income in retirement -- even better if that person's plan is bolstered by multiple properties. This person may be happy if all of the ownership and rental expenses are covered by the rental income and just $100 per month is left over as cashflow. If your retirement income goal is $50000 per year, then ten free and clear properties producing at least $425 monthly NOI will meet this requirement, or seven properties with a $715 monthly NOI. Certainly do-able with a 30-40 year time horizon. Contrast this to the investor who wants to quit the day job and be a full-time investor. This investor will probably want several rental properties with a high enough monthly cash flow to comfortably quit the day job. If this investor needs $4000 per month income, then 8 rentals generating $500 per month cash flow will suffice, or 10 properties each generating $400/month, or whatever multiple of cashflow and volume produces the amount of cash needed.

My point is that your own goals and needs should dictate your investment strategy and determine the metrics you use to acquire your rental portfolio. If your plan is to buy-and-hold for a rental income that supports your retirement lifestyle, then I suggest your primary qualification metric should be NOI = 125% x debt service. If NOI is at least 125% of the principal and interest portion of your loan payment, then the property should be able to sustain itself without need to contribute additional cash out of pocket each month for the unexpected repairs. After this primary metric is satisfied, your secondary metric is: net cashflow must be positive. I usually demand a minimum $100 net positive cashflow per month, but that is my criteria. I find that with multiple properties, I just need a minimum net cashflow to maintain a large enough cash reserve for major systems replacement as they arise.

Let me close with why investors buy rental properties. The three main reasons to own rental property are (1) cash flow, (2) future appreciation, and (3) tax benefits. A positive cash flow is nice, and the property depreciation will make some of that cash flow tax free. For example, if your net cash flow is $3000 per year, and your annual depreciation is also $3000, then your net taxable rental income is $0. At these numbers, five properties will shelter $15000 annual cash flow. Over time, future appreciation improves the profit on the property your tenants are buying for you and that profit is taxed at a favorable long term capital gains tax rate (think really great IRR) or the taxes can be deferred indefinitely with a 1031 exchange (why pay taxes if you don't have to).

Tax benefits and appreciation are really just the icing on the cake; cash flow is the only real reason to own rental property.  Don't let the lure of future appreciation and the promise of tax benefits persuade you to purchase a marginal cash flow property or even a negative cash flow property because appreciatiion may disappear as market conditions change and tax benefits are subject to the whims of Congress in the guise of tax reform.